Trending
Inflation was a drag on markets last year and while recent readings of the Consumer Price Index (CPI) indicate some cooling, high prices remain an issue advisors and clients will have to contend with this year.
That’s particularly true when it comes to advisor relationships with retirees – a demographic that’s particularly vulnerable to inflation because rising prices erode purchasing and diminish income. Last year’s inflationary spell was particularly troublesome for retirees because it was accompanied by the failure of assets with inflation-fighting reputations, such as Treasury Inflation-Protected Securities (TIPS).
On a related note, 2022 was the year since inception in 1976 for the Bloomberg US Aggregate Bond Index. In other words, income suffered as inflation rose, crimping retirees in the process.
The good news for advisors and retired clients alike is that there are practical strategies for combatting inflations, several of which can help advisors display value-add propositions to clients and some of these tactics don’t require material alterations to portfolio holdings.
Inflation-Fighting Strategies for 2023 and Beyond
As noted above, some of the avenues for inflation are easily implemented and not likely to be off-putting to clients.
“Tactically, the most obvious place to start cutting back is by postponing major outlays for things like a home renovation, a new car, or a major trip. Canceling or postponing big ticket items can clearly have the biggest impact, but don't overlook the power of smaller adjustments—for example, scaling back your streaming services or enjoying your meals out at lunch instead of dinner,” notes Charles Schwab’s Carrie-Schwab Pomerantz.
In some cases, advisors may want to discuss part time work for retired clients that are in good health and seeking intellectual stimulation. However, this can be a sensitive topic because some clients believe the purpose of retirement is to avoid work. There’s nothing wrong with that view. However, return-to-work scenarios can be avoided or reduced with adequate minding of cash.
“After you've counted in your RMDs, you might want to look to your taxable accounts, focusing on investments you've owned for more than a year to minimize the tax hit,” adds Schwab-Pomerantz. Other tax-smart moves could be using losses to offset gains. And of course, it's always smart to sell any low-quality investments. If you wouldn't buy it today, consider selling it now.
Of Course, Investments Matter
In 2023, one of the primary opportunities advisors have with retirees is helping them stay the course with investments – both fixed income and stocks. As noted above, broad bond benchmarks posted one of their worst years in decade. The S&P 500 wasn’t picnic, either, shedding 19.4%.
Statistics like that chasten all investors and prompt many to panic sell. History shows that without guidance, retail investors are likely to hit “sell” button at the absolute worst time, turning a short-term mistake into a permanent one. That’s where advisors come in.
“There's no question that the last year has been an incredibly challenging time for investors—especially for retirees on a fixed income,” concludes Schwab-Pomerantz. “But if you avoid the temptation to run for the hills, and instead take your time to analyze and make carefully planned changes to your budget and portfolio, you can position yourself to regain lost ground and sleep a little better at night.”
Related: Combat Interest Rate Turbulence by Keeping Ultra-Short and Sweet