Is inflation really a risk to your clients’ retirement plan? On the one hand, inflation hasn’t posed a major threat to the economy in 35 years.
Compounded inflation rates 1900–present averaged 3.15%—but there were four periods (1913–1919, the 1940s, the 1970s, and the 1980s) when inflation significantly outpaced the average.
After three decades of low inflation, we might be due for high inflation soon. But even if inflation remains steady at 3%, it can cut your client’s purchasing power in half over that time., It’s perfectly reasonable to ask what strategies exist to protect your clients from inflation risk.
Maximizing Social Security benefits is the logical place to start. The annual cost-of-living adjustment (COLA) is determined by an automatic formula tied to the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). The COLA provides a powerful motive to optimize Social Security benefits via delayed claiming and coordinated filing strategies. This technique is by far the least expensive inflation-adjusted annuity around. Your client will receive some 8% more income for every 12 months she delays filing past full retirement age.
Do other asset types provide inflation protection? Equities often are mentioned as a way to keep up with inflation, but they are not a hedge, since equity returns are not correlated with inflation. The other options feed into arguments about the value of an inflation hedge. Treasury inflation-protected bonds (TIPS), for example. The nominal bond will give you more purchasing power. If inflation is higher than expected, though, the TIPS bond will generate more real spending power.
There are also CPI-adjusted annuities, which offer expensive protection against inflation risk for those who believe inflation will stay low. Any three decades of inflation examined will show that the consumer price index doesn’t reflect the rising prices of some goods and services, especially the higher-touch services seniors will likely need, such as health care.
For more information, please read:
Is Inflation a Threat to Retirement Plans? | Wealth Management