To Tame Inflation: Plan!

What advisors and clients can do

Inflation seems to be rising. Certainly, Americans are noticing higher prices at the gas pump. But the real question in a wealth and retirement forum, is how should investors and, in particular, soon to be retirees, be thinking about inflation?

The official words are that as of September 1, 2021, the consumer-price index pegs inflation at 5.3%. Then as gauged by the Federal Reserve Chairman Jerome Powell, the figure is 4.2%. Both are above the current long term target of 2%. But according to Chief Economics Commenter Greg Ip from the Wall Street Journal, “most economists agree with Mr. Powell that inflation has jumped only temporarily and will fall to just above 2% in a year.” However, “derivatives markets last month assigned a 40% probability to inflation averaging more than 3% over the next five years, according to the Minneapolis Fed.”

Growing base retirement income

Jay Abolofia 1.JPGAccording to Jay Abolofia, PhD, CFP®‎, founder of Waltham, MA based Lyon Financial Planning LLC, “based on recent analyses of consumer prices and the Fed's ability to appropriately manage these risks, I don't expect inflation to be a major issue in the near-term. However, rising inflation in the long-term is certainly a risk that many, especially older, individuals face in their financial plans.”

To help manage this risk “I recommend that my clients, especially those in or near retirement and those relying heavily on non-inflation-protected pension or annuity income, allocate a significant share of their fixed income holdings to inflation-protected US Treasury bonds (TIPS) and to maximize their lifetime Social Security retirement benefits by delaying filing to age 70.”

Next up, Carlos Dias Jr. is the founder of Dias Wealth. According to Lake Mary, FL-based Dias, “this issue has been politicized to become more of a talking point. Until we have more constant data suggesting inflation is a long-term problem, it may not be a worry. Most of the short-term inflation in May, June, and July 2021 has been due to supply and demand within transportation, specifically used car and truck sales, as well as housing.”

Carlos Dias1.jpgHowever, continues Dias, “if the Federal Reserve increased interest rates and reduced the aggressive bond-buying, inflation should decrease.” Regardless, concerned investors, “should protect their resources with annuities instead of bonds or junk bonds in order to seek returns as guaranteed income in retirement – one of the primary concerns of retirees,” says Dias. “Once a client secures basic income, the remainder of their resources can continue to grow in order to combat future inflation.”

Trust the plan

Tiffany B. Ballard, CFP®, AIF® NAPFA-Registered Financial Advisor and President of Bergland Wealth Management, Inc. in Ridgeland, MS, says inflation is most definitely a concern for investors nearing their retirement years. But it is in this regard she offers three bits of advice.

Tiffany B. BallardFirst, “Do not fear; fear paralyzes. Rather, remain calm and focused on the things that we do have control over, like our spending and savings.” Then second, continues Ballard, “remember what history has taught us: equity holdings fight inflation; fixed income dampens volatility; and maintaining an emergency reserve fund protects against unplanned events.”

Finally, Ballard says investors should “plan for the worst and hope for the best. But having partnered with a trusted advisor and developed a financial plan that is revisited as life happens give us the ability to find peace in all circumstances and in any economy. It is the advisor’s responsibility to monitor the ‘plan’ for changes, and amid inflation or other volatility, the best thing the client can do is maintain open dialogue with their advisor.”

What’s different for Gen X, millennials and Gen Z?

One way to better understand why inflation management is so important for soon-to-be retirees is to compare and contrast the risks for younger investors. Investors who are further from retirement need to think about inflation differently.

As Abolofia explains, “for most younger individuals, their largest asset is not their already accumulated financial capital, which will be limited, but rather their human capital, or ability to earn for several more decades. Thus, the biggest risk of runaway inflation to their financial plans is not an erosion of the purchasing power of their savings. Rather, their concern is that their earnings – and therefore after-tax incomes – don't keep up with the rising cost of their expenses. However, earnings often keep pace with inflation across many sectors, so I don't see this as a major risk to much of the younger generations.”

Derek DelaneyAlso weighing is Derek J. Delaney, CFP®, ChFC®, EA, CSLP, Founder & Lead Planner at PharmD Financial Planning LLC. “The biggest concern I have for millennials and Gen Z in a rampant inflation environment is their debt load,” says Delaney. Higher inflation can lead to higher deficit spending and “may mean larger credit card balances, more defaults on student loans, and an increase in the number of bankruptcies among this type of demographic.”

Of course, as much as it hikes costs for younger people, if not factored in to planning, inflation can also harm already and soon-to-be retirees. As Delaney concludes, “it is easier to control cash flow and debt when the goods and services you spend money on remain stable. When inflation rises, those other expenses take up a bigger portion of your available cash flow.”

So that’s how a handful of advisors address inflation risks. Care to share your ideas or concerns? Email us at This email address is being protected from spambots. You need JavaScript enabled to view it..



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