Advisors often warn clients about inflation's impact on a retirement plan. But in recent decades, it was easy to shrug off inflation concerns.
Not anymore. With inflation hovering near a four-decade high, these once-academic conversations are hitting home. Clients can see for themselves how rising prices are eating away at their savings.
Older clients are particularly attuned to inflation. They see that their dollar buys less than it did a year ago. And they're aware that their long-term financial future can crumble if these worrisome trends continue.
Karen Heider, a Houston-based advisor at Concenture Wealth Management, says that her pre-retiree clients want to know to what extent high inflation affects the plan they've put in place. They wonder if they should delay retirement and work longer to reset their plan.
"Retirees are more concerned," she said. "They no longer have that paycheck. They're living off their (investment and pension) income," so the erosion of their buying power stokes anxiety.
For those who remember the 1970s, the sting of inflation is hardly new. During parts of that decade, annual inflation exceeded today's rate and hit double digits.
Fears of a prolonged inflationary period are leading some investors to engage in worst-case thinking. One of Heider's clients asked her, "If inflation stays at 8% for 10 years, what would that do to my assets?"
"It speaks to the fear retirees are getting from watching TV all day," she said. " There's a lot of talking them off the ledge."
View Inflation Concerns Through Each Client's Eyes
In addition to putting today's inflation concerns in a historical context, advisors also crunch numbers to comfort anxious clients.
To allay clients' concerns, Heider uses Monte Carlo simulations, mathematical models of many possible outcomes, to show that their portfolio could withstand even the worst-case scenarios. She also organizes client assets in three buckets with different time horizons — short-term, mid-term and long-term — to mitigate risk.
Another challenge is reassuring clients to stick with equities even as they lose value due to inflation-induced market volatility. Despite an advisor's best attempts to educate clients ahead of stomach-churning declines, some investors still want to sell stocks during market swoons.
"If they want to get out of the market on bad days, we tell them to stay in stocks," Heider said. "It's the best way to outpace the market over the long term and ride out volatility."
Inflation can scare retirees and lead them to cut spending or even seek part-time work. But advisors know that it affects each individual differently.
Financial planners sometimes set aside the headline inflation rate to focus on a client's specific circumstances. Variables include the cost of living in their region and their saving, spending and lifestyle habits.
This enables clients to view inflation through a more personalized lens. They might realize, for example, that paying $5 or even $10 more to fill their car's gas tank will result in a relatively minor increase in their overall budget.
"Not all inflation is created equal," said Peter Salkins, a certified financial planner at Integrated Partners in Waltham, Mass. He cites costs for healthcare and some professional services as less impacted by soaring inflation.
Find Positives Amid Inflation's Negative Impact
Higher prices can also spur clients to rethink their discretionary expenses. In the long run, scaling back their spending can work to their advantage.
"There could be positive components to what's going on now with inflation," Salkins said. "You might downsize to one vehicle. Or sell your house (and downsize). It can make sense for some clients to remove costly expenses."
For other clients, the challenge for advisors is reassuring them that despite higher inflation, they can continue to stick to their plan without major disruptions. Worried retirees may react to rising prices by instinctively cutting back on non-necessities.
"If they want to travel, and travel may cost more for the next couple of years, we will look at whether they have the money to support that," Salkins said. "We do stress-testing of inflation at certain rates over the long term. So if it runs 3% or 4% over the long term, we can show clients the likelihood" of their retirement savings outlasting them or alternatively running low.
Diversifying a client's investment portfolio to hedge against inflation adds another layer of comfort.
Mark Wilson, a certified financial planner at MILE Wealth Management in Irvine, Calif., says he integrates alternative investments into client portfolios as a buffer for inflation concerns.
"We have 10% to 15% in things that do well in an inflationary environment," Wilson said. Examples include investments in farmland, real estate and infrastructure such as toll roads.
He also highlights a side benefit of rising inflation: Clients' Social Security payments will increase with inflation adjustments as the consumer price index ticks up.
