Inflation and Retirement: Should Investors Retire Now?

The Consumer Price Index inched toward a double-digit increase over the last year.1 Nearly everyone is feeling the strain of rising inflation. In fact, a Pew Research Study found that seven in 10 Americans cite inflation as the top problem facing the country, beating out affordable healthcare, violent crime and climate change.2 

Many forces are combining to create financial uncertainty among investors. If rising inflation weren’t enough, add to it lingering concerns about the pandemic, international conflicts, political unrest and unprecedented market volatility.

During times of uncertainty, investors may be prone to making irrational decisions about their finances. Clients who had hoped to retire in the near future might begin second guessing their plans and opt to remain in the workforce until things settle down. If and when that happens is yet to be seen … and the Great Resignation demonstrates how others might opt for an early retirement even if their portfolio suggests they should reconsider.

Should Investors Stay the Course?

Most advisors would agree that reactionary short-term investment decisions may negatively impact long-term results. Radically shifting gears and altering retirement plans in the midst of global economic uncertainty could leave some investors with regrets

It’s important to consider, however, that while inflation has driven expenses higher, other economic factors might help balance things out.

For example, everyone knows that home prices have increased significantly, meaning your clients may now have much more equity in their homes than previously thought. The skilled labor shortage also generally translates into higher earnings for many as businesses increase salaries in an effort to retain workers. 

But what about investment portfolios? Despite the markets’ ups and downs, the average investment portfolio has generally grown since the pandemic. The Dow Jones topped out at nearly 29,400 in February 2020 — its highest recorded level to date. We all know what happened next: it tumbled below 19,000 a month later. And where do we stand now? The Dow recovered relatively quickly and was at about 32,000 as of August this year.3 

In any other pre-pandemic cycle, a two-year growth of several thousand points would have been considered extraordinary and hailed as a bull market. Even though inflation may eat away at some of those gains, it’s important for advisors and their clients to maintain perspective.

Of course, it’s been a wild ride from 2020 until now. But helping investors see the big picture may help them stay the course. Combining all the factors noted, including asset, salary and portfolio growth, retirement may, in fact, be more than feasible. Those who’ve been planning it all along and have been consistently working toward their retirement goals may be well poised to follow through on their plans. 

What About Early Retirement?

When helping clients assess whether they should retire earlier than planned, they’ll need to be realistic about potential expenses in retirement. When inflation was relatively low, some assumed it would stay that way. Clients may now want to account for higher inflation in coming years. In the event it doesn’t happen, they’ll be further ahead. Naturally, other expenses like health insurance need to be factored in until they’re old enough to claim Medicare benefits. And when to claim Social Security and the implications of claiming sooner than later need to be part of the conversation, too.

As clients prepare for retirement, it may be prudent to encourage them to increase their cash reserves. This may sound counterintuitive since the value of cash generally decreases with inflation. It doesn’t take much to do the math. If a savings account earns 1% annual interest and inflation rises more than that, that money loses purchasing power. 

Despite potential downsides, it’s still important to emphasize the importance of having an emergency fund. Most agree that it should include three to six months’ worth of living expenses. With inflation the way it’s been, it’s prudent to remind clients that those living expenses aren’t what they used to be. It might be wise for them to increase the amount in their emergency savings fund in light of inflation.

It’s also a good time to reassess a client’s risk tolerance. Despite overall market gains, the volatility and constant news cycle of global and economic woes may cause some clients to consider taking a step back from higher risk investments. For anxious investors and those who prefer to have some “safer” assets, annuities should be a consideration

In particular, risk control annuities allow investors to participate in potential market growth up to a cap while setting a limit on losses. Fixed annuities can lock in a competitive interest rate while protecting their principal, and income annuities provide a steady stream of guaranteed income.

Supplementing traditional investments with annuities may be more appealing than ever to wanna-be retirees and those who’ve already crossed the threshold, especially to those who are wary of potential future market downturns or simply want to have more control over their finances.

Before diving into products, features, and asset allocations, however, it’s important for you and your clients to assess the role their emotions play in their approach to finances. Making decisions based on their personal values rather than on emotions and external factors may help them avoid regret resulting from compulsive actions. Start the conversation with clients today by using our helpful and award-winning Behavioral Finance Advice (BFATM) resources. Simply click the link below. 



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