Raleigh NC Financial Advisor: Inflation and Your Retirement
Rising costs might not be as big a threat to your retirement lifestyle as you fear.
If you're already retired and living off your investment income, you may be especially worried, regardless of the size of your nest egg.
Will your retirement plan be able to withstand higher prices? For how long? And how high will inflation go? Will it add to the volatility in the stock market? Will it prompt the Federal Reserve to raise interest rates faster than expected? Perhaps most important, will it impact your lifestyle?
Because financial plans work within ranges of possibilities, they are designed to withstand bumps in the road.
Here's how having a diversified investment plan—and the appropriate insurance and estate planning strategies—can help address some of your top concerns regarding rising prices and your lifestyle and legacy.
Should I Change My Mix of Investments?
Most retirees already have some inflation-adjusted protection through Social Security, and some may have inflation-adjusted defined benefit pensions or annuities with cost-of-living adjustments.
If you assume that inflation will average 2% to 2.5% in the upcoming years, your investment goal would be to earn a return of at least that much or greater. If you think inflation is going to go up beyond that—either temporarily or long term—you may want to consider inflation-resistant investments for your portfolio and diversify across asset classes to help reduce inflation risk further.
Here are some options that individual investors can consider:
US stocks can grow through inflationary periods, as businesses can pass on higher prices to their customers.
International stocks can also do well, particularly when inflation is specific to the US economy.
Investments tied to commodity prices have historically benefitted from inflation, as demand rises for things like aluminum, copper, gas, or corn.
With bonds, you might want to think about Treasury Inflation-Protected Securities (TIPS), which can perform well as inflation rises.
And if the inflation outlook radically shifts higher because of unforeseen circumstances? The same strategies would still apply.
Do keep in mind that diversification and asset allocation do not ensure a profit or guarantee against loss.
Should I Have More in Cash or Less?
If you think your retirement lifestyle is going to cost more in the future because of inflation, your instincts might be telling you that you need more cash available for everyday expenses.
For some retirees, the cash allotment is just a few months of spending, or maybe the amount needed yearly as a required minimum distribution from their IRA or 401(k) accounts. For the more conservative, it could amount to a few years of living expenses or more, depending on how they feel about the potential for withstanding a market downturn.
But assuming you have a solid cash plan in place now, you might want to consider doing just the opposite if you are particularly worried about inflation: Hold less cash and invest for growth potential.
Can Annuities Help Reduce the Impact of Inflation?
Periods of high inflation may be easier to live through if your essential expenses are covered by guaranteed income—particularly if there is a cost of living adjustment (COLA) selected.
Unlike investments, fixed income annuity payments are not dependent on the markets, and they continue making regular and predictable payments in any market environment. If you're interested in receiving payments that help keep pace with inflation, a cost of living adjustment is an optional feature that may be available. Of course, there are trade-offs: Most income annuities restrict or even eliminate your access to your assets, and are subject to the claims-paying ability of their issuers.
Overall, we believe that annuities, together with other guaranteed income sources like Social Security and pensions, can be the best way to cover essential expenses.
How Can I Insure Against the Unknown?
Rising costs for a trip to Hawaii are one thing. Rising costs for prescription drugs and hospital care are on another level. Health care costs have been rising faster than the rate of inflation for years and will likely continue to do so.
Depending on your needs and your financial situation, you might want to consider long-term care insurance. You might also want to assess your life insurance and disability insurance needs, especially if you are still working in retirement in some capacity and count on that income to cover your spending.
Will Inflation Limit My Legacy?
Even if your personal purchasing power isn't really affected by inflation, you may still be worried about the overall economy. If the stock market falters or the economy snags, it could affect your overall wealth and limit what you can leave to heirs or charity.
Because estate planning is by nature a long-term process, there are multiple factors that may have an impact on it, including inflation concerns. As a result, an estate plan should be constructed in a flexible enough way so that the plan can adapt to changes while still accomplishing a client's goals. A plan that is too restrictive may require more frequent updating (with the associated legal expenses) or risk not being as successful as originally intended.
Inflationary concerns and the potential impact on the overall economic environment may ultimately prove to be less influential than, for example, a potential change in estate tax law.
Bottom Line
Whatever direction inflation eventually takes, having a plan to ensure you are able to live the life you want is essential. Working with a professional, such as a financial advisor or tax professional, can help you to develop the right strategy that fits your unique needs and situation. These professionals can provide advice on the best changes to make in order to ensure you are able to reach your goals while also considering any taxation implications.
It is important to have a comprehensive plan in place to navigate the ever-changing economic landscape and make sure you are on track to achieve your financial goals.
Sources
https://www.schwab.com/learn/story/how-should-retirees-respond-to-inflation
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