A Common Scenario
One evening my in-laws and parents stopped by to drop off presents for my child’s birthday.
While we were chatting, the topic of rising expenses came up. They mentioned how the cost of everyday items such as groceries, gas, and other goods have impacted their finances. Like many, I have also noticed this – our grocery bill has climbed every month recently for the same (or less) amount of food.
A few factors to blame are:
- Global supply chains are strained1 (think chip shortages and cars)
- Global shipping issues2 (backlog of ships at ports, container shortages, increased shipping costs)
- Labor shortages requiring employers to offer higher wages3 (a local pizza place was offering $17 per hour while the state minimum wage in Nebraska is $9 per hour)
- Central banks around the world have been printing money with no end in sight, flooding money into economic systems for both investment and consumption
What Are the Experts Saying?
The Fed originally believed inflation was temporary but has since changed its stance on that. In fact, more and more experts are saying inflation is here to stay for the foreseeable future. Everyone is feeling its effects, so the question facing financial professionals is: “How can we help our retired clients maintain their lifestyle during periods of inflation?”
A few of the strategies you have in your arsenal to counteract inflation are:
OPTION #1: One-Off Financial Recommendations and Strategies.
UPSIDE: You could advise a client to take more portfolio risk since fixed income yields are so low.
DOWNSIDE: Unfortunately, this could do more harm than good especially if they take on more risk before a down market.
ADD MORE GUARANTEED INCOME
UPSIDE: Add (more) guaranteed income for a client, which guarantees a payment in dollar terms.
DOWNSIDE: Keep in mind one dollar today will not buy as many goods and services in ten, twenty, or even thirty years from now.
RELY ON SOCIAL SECURITY COLA
UPSIDE: Advise them to rely on Social Security COLA (Cost of Living Adjustment), something that theoretically, over time it will grow when adjustments are made at the federal level.
DOWNSIDE: COLA does not always mirror inflation over the long term. Also, Medicare is raising rates significantly, so the projected 5.9% COLA for 2022 won’t be hitting the clients’ bottom line.
OPTION #2: Multi-Pronged, Segmented Approach.
Another method is to consider using a multi-pronged, comprehensive approach that provides inflation-adjusted income throughout retirement by:
Splitting investments into different time segments.
Designating steady income streams.
Investing for the long-term with varying degrees of risk exposure.
This multi-pronged approach aims to protect against sequence-of-returns risk in the early stages of retirement.
Future investment time segments are then invested with varying degrees of risk exposure to allow long-term return averages to work in the clients’ favor.
By splitting up the investments in time appropriate segments, not all a client’s income is impacted negatively by a downturn in the markets or an upswing in inflation early on in retirement. As the client progresses through retirement, the result is long-term income without the effects of inflation.
- Protection against sequence of returns risk early in retirement
- Inflation adjusted income over the course of retirement
- Minimized risk of the client running out of money
- Regulated client emotions during the market ups and downs
By using this approach, you can devise a strategy that can help pre-retirees plan for higher inflation when they retire, but also help retirees address inflation with their current income and as they go through retirement.
The downsides can be it is challenging to know how to get started and the work, if done manually, can be time consuming. The good news is that we can help with those challenges.
If you are interested in discussing any of these points in more detail, contact Iron Point today!