How Should a Family Account for Inflation When Planning Returns?

Assess inflation by asking what the portfolio's return can buy after the family's costs and obligations. A nominal return is only part of the picture. If prices rise, the family may need more income to maintain the same standard of living or meet the same commitments.

Start With Spending and Obligations

Estimate the family's recurring spending and taxes, then account for planned commitments as a separate item. Consider how each amount might change over time. Separate near-term needs from long-term goals. This helps the family set a return objective that reflects what the capital must do, without choosing a target in isolation.

Use a range of inflation assumptions when reviewing the plan. The Single Family Office discusses how inflation can erode wealth and why hard assets may appeal to families seeking diversification. A hard asset will not always preserve value. Consider the source of expected income or appreciation and assess liquidity. Also consider the risk that the asset does not perform as intended. The guide to protecting purchasing power explores the wider portfolio question.

Compare Nominal and Real Outcomes

Review projected returns after accounting for inflation and fees. Include taxes when those assumptions are available. A positive nominal return may still leave the family with less purchasing power. Compare the outcome with the family's actual requirements, such as sustaining spending or preserving capital for future generations. When investment structures or entities affect taxes, talk with your CPA or attorney.

Consider assets that may respond to inflation through income or tangible value, while recognizing that they carry their own risks. Real estate, for instance, may generate rent and retain some underlying property value. Financing costs and occupancy affect the result, as do expenses and sale timing. The guide to balancing growth and current income can help organize those tradeoffs.

Keep Assumptions Connected to the Plan

Inflation assumptions should be consistent across spending projections and return targets. Keep liquidity plans aligned with them as well. Review assumptions when the family's spending needs, asset mix, or currency exposure changes. Families that hold assets or make purchases across borders should consider purchasing power in the relevant currencies, not only in the currency used for portfolio reporting.

For cash reserves, weigh stability and access against the risk that purchasing power declines. Review the cash policy periodically to confirm it still fits the family's needs. The multi-generational wealth projection can help illustrate how assumptions affect wealth over time. The guide to setting a needs-based return target connects those assumptions to the family's required outcome.

No matter if the U.S. continues to succeed in taming inflation, commodities and hard assets are still favored by family offices and HNW investors because they provide comfort and diversification against inflation and other adverse circumstances that could affect a portfolio's value.

Sources: The Family Office Book, The Single Family Office. Informational only, not financial, legal or tax advice.