Your Retirement … with Brian & Bob: Adjust your retirement portfolio to account for threat of inflation

“Inflation has been in the 2-3 percent range historically and that is certainly more palatable than what we experienced this past year.”

By Bob Price and Brian Harrigan

Inflation is now seen as one of the greatest threats in retirement, topping Americans’ other concerns like outliving retirement savings, increased health care costs and job security. A recent study conducted by Allianz Life Insurance Company of North America found that 25 percent of Americans see inflation as the greatest risk to their retirement plans. That is an increase from 8 percent in 2020.

With the COVID-19 pandemic increasing government spending, inflation rose 6.8 percent between November 2020 and November 2021. That is the fastest increase we’ve seen since 1982 which has been largely driven by market dips prompted by news related to COVID. Increased costs are affecting all consumers and have more heavily impacted those in their later years of retirement. In some circumstances, retirees are having to choose between essentials like rent, food and prescription drugs.

Inflation has been in the 2-3 percent range historically and that is certainly more palatable than what we experienced this past year. Still, many do not realize that if inflation stays stable at 3 percent, the cost of living will double every 24 years. Recent data and trends have caused many to start evaluating changes to existing financial plans to help reduce the long-term impact of inflation.

Experts say modest inflation is here for the long haul and that retirees need to be prepared for inflation over several decades in retirement. Many are adjusting their approach and taking on more risk by rebalancing portfolios and asset classes to maintain their quality of life. Retirees with a fixed income are hit especially hard as they may not see their income keeping up with inflation. The old rule of thumb that 100 minus your age provides an appropriate percentage of your portfolio’s equities is outdated. As a result  many retirees are seeking equities, stocks, and real estate to hedge against inflation.

Tax diversification of assets can help when molding strategies for drawing retirement income. Strategies often incorporate options for withdrawing required minimum distributions (RMDs) to help maximize net spendable income. Products guaranteeing an increasing lifetime income are commonly used to balance risk, allowing retirees to take on more risk in other asset classes for a chance at better gains. Public interest in tax-advantaged vehicles such as ROTH retirement account options, municipal bonds and life insurance are on the rise.

Retirees are also exploring various options to address end of life medical and long-term care costs. Traditional long-term care policies, life insurance with long-term care or chronic illness riders, and other hybrid products are important to explore as they can offer tax free money for care. We can expect the government to continue increasing per diem limits to address rising costs and inflation. Some experts expect state and local governments to require consumers to purchase long-term care and chronic illness products like we saw recently in the state of Washington. This has caused a boom in the industry and  insurance companies to address pricing factoring in new assumptions.

Furthermore, Social Security payments should continue to be adjusted each year to keep pace with inflation, but the cost of living adjustments aren’t always enough to cover rapidly increasing costs like health-care. Planning for the impact of inflation on essential services is of the utmost importance.

Despite all of these issues of concern, only 22 percent of recent survey respondents said they plan to seek advice from a financial professional in 2022. This is down from 27 percent last year. A good advisor will help tailor a plan that is comfortable for you. Balancing your goals, risk tolerance, and allowing flexibility are key components to achieve the best outcome. We recommend you seek help from a professional you can trust and do not procrastinate on planning in 2022.