We’ve all heard about Warren Buffett, the 91-year-old multibillionaire known for his friendly demeanor, modest style of living in Omaha, and remarkable ability to create wealth. How does he make so much money? How does Warren and his long-time associate, Charlie Munger (who is 98), choose their investments? And what do they think about today’s environment of high inflation?
Well, Warren and Charlie have been investing for Berkshire Hathaway since 1962 so they have certainly invested during periods of high inflation. In fact, if you look at the historical chart of inflation below, you might notice an interesting pattern – when Warren and Charlie started investing for Berkshire Hathaway in the early 60s, inflation was very, very low. And then a decade later, inflation started drifting consistently upwards.
United States Inflation
Warren Buffett is chairman of Berkshire Hathaway, a multinational conglomerate holding company. What does this mean? Well, in simple terms, the company invests in or owns a variety of other corporations that make products sold all over the world. For perspective, Berkshire Hathaway is so large that it files a 30,000+ page Federal income tax return.
In the 1950s, Berkshire, which made linings for men’s suits, and Hathaway, a cotton milling company, merged. Buffett began investing in Berkshire Hathaway in 1962, becoming its Chairman and CEO in 1970. Munger is Vice Chairman. The company abandoned the textile business in 1985.
In the early 1990s, Buffett began to focus on actually owning companies, and today Berkshire owns quite a few. In fact, Berkshire has 100% ownership in over 60 major companies, the majority share of several other major publicly-traded companies and minority holdings in dozens more.
One of Berkshire’s biggest known ownership segment is in the insurance industry and the company owns GEICO, General Re and several smaller insurers as well. Berkshire also owns the large Burlington Northern Santa Fe Railroad, along with a trucking company and national auto dealer chain.
Buffet On Inflation
“It’s extraordinary how much [inflation] weve seen,” Buffett said, as he talked about soaring prices at his Nebraska Furniture Mart and many other Berkshire subsidiaries.
But Buffett also thinks that the very best defense against inflation is to be great at what you do, producing a great product/service that is in demand and offering a product/service that people will pay for. Specifically, he said:
“The best protection against inflation is your own personal earning power…No one can take your talent away from you,” Buffett said. “If you do something valuable and good for society, it doesn’t matter what the U.S. dollar does.”
When asked to predict inflation, Buffett said that predicting future inflation is a fool’s game, and that no matter what someone might suggest, the truth is that no one can really know how much inflation there will be over the next 10 years, or 12 months, or even four weeks.
“Inflation swindles almost everybody,” Buffett said, whether they are a stock investor, a bond investor, or a “cash-under-the-mattress person.”
Berkshire Hathaway has been an overwhelmingly successful company. In the more than half a century that Buffett has controlled the company (1965-2021), Berkshire has grown at an average rate of 20.1% annually. During this time period, the S&P 500 (inclusive of dividends) has averaged 10.5% each year. Buffett doesn’t just beat the market – he smashes it.
So, what are Buffett’s strategies for growing this wildly successful company?
Buffett’s strategy requires patience, a long-term focus, and buying low (the value investing approach). The first thing to know about long-term, value investing: It’s very difficult to determine whether a company is undervalued by the market, with greater intrinsic worth than most investors see. To make good decisions, you have to be able to analyze a massive amount of financial data, the market for a company’s product, its management, and the future. Recognizing this difficulty, Buffett advises other investors not to consider themselves “know-it-alls”.
He has said, “There is nothing wrong with a ‘know nothing’ investor who realizes it. The problem is when you are a ‘know nothing’ investor but you think you know something.”
As Buffett said about wise planning for the future, “Someone’s sitting in the shade today because someone planted a tree long ago.”
But what if all your family members want to sit under the retirement tree you planted long ago? Then what?
Planning For Your Retirement Tree
Your open heart and your destitute relatives can combine to threaten your retirement savings – savings you soon may need. Learn the true cost to your future before you write that well- intentioned check.
If you’re close to joining the other side of 50, you have probably noticed already that patterns are emerging about how you spend your money differently – including assets you set aside for retirement. And you might be feeling the pressure to further contribute to family finances in ways you hadn’t planned.
For example, are you prepared for:
- Family members having a tough time financially will approach you because you are and remain responsible about saving and investing.
- Your child needs a loan or your sibling needs help paying bills.
- Your mother with dementia must go into assisted living but lacks long- term care insurance (LTC)
These costs are probably not built into your retirement plans.
Expanding Your Retirement Tree Shade
Making things worse is that people live longer now so you need to plan as if you will live into your 90s, some 40 more years. And guess what?
- Your parents may also live longer and need financial assistance in those years.
- Your kids may boomerang after college or in early adulthood, moving home to live with you again for years.
And here are two other not-so-pleasant trends that most certainly do not prepare for:
- Children who have addiction issues and need their parents to pay for the kids’ long-term rehab – care that sometimes comprises relapses and requires even more treatment. Parents face how long to keep paying for care, a cost rarely foreseen and included in any financial plan.
- Many plan for organized philanthropy in retirement but instead give money to needy people in daily life. These gifts are nondeductible and don’t fit into planned charitable giving.
And how many of us ever really plan for divorce? But did you know that:
- The Journals of Gerontology found that more than 1 in 4 people getting divorced in the United States are over age 50, and over half of those divorces happen after 20 years of marriage.
- Pew Research data from 2017 found that the rate of divorce after age 50 nearly doubled over the past 30 years.
Divorce usually stretches both parties financially and creates more complicated domestic situations – often creating need for frequent financial help, as well.
Plan For Unexpected Costs Well Before You Retire
These issues only get more complex as retirement approaches, and with it your fears of outliving your money and becoming a burden on your family.
Few families discuss long-term care needs or even how to approach planning for elder care. Only a little more than a third (37%) of those 50 and younger believe they will need long-term care, for instance, when in reality 70% will eventually need it, according to the U.S. Department of Health and Human Services.
Out-of-pocket elder care for either you or your relative drains savings fast. Costs range from an average of $18 an hour for in-home care to some $10,000 a month for private care in a nursing home.
Alzheimer’s disease is another top fear. The study reports that nearly half of people 85 and older have Alzheimers or related dementias. No doubt most of those retirees prefer to remain in their own homes.
You need to know about the costs of retrofitting you home to accommodate an elderly relative, and what long-term care insurance does and doesn’t cover when under your roof. Your use of long-term care insurance to cover home health care often reduces the policy’s lifetime benefits, for instance. How much coverage remains for institutional care if you eventually need it?
When handling these very personal and complex issues, consult your financial advisor, an elder care attorney and maybe a geriatric specialist. At the very least, think about whether you are becoming the family bank and if you should build the costs into your retirement plan.
Your Financial Advisor Can Coordinate Your Plan
Remember this: when you plan for retirement – no matter how far away it might be – you need to model your financial expenses, anticipate unexpected expenses, think about your lifestyle choices, account for future inflation, and make various market assumptions. More importantly, these must be modeled within the confines of your risk profile and goals.
But when you run these models, you will undoubtedly struggle between your current and your future-retired-self. For your own well-being, favoring the future you is the best choice. Trouble is, this is very hard to do.
Your financial advisor can help you favor your future-self. So you can look forward to sitting in the shade of your retirement tree.
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