Retirement Portfolio Discussions
Protecting Retirement Portfolios from Inflation
Retirees are hit hardest by inflation
- The inflation rate is higher for those in retirement versus those who are approaching retirement.
- Inflation can be volatile and unpredictable, posing a constant threat to a client's purchasing power. It ranks as the #1 concern among pre-retirees and retirees.*
- Even at today's low inflation levels, retirees run the risk of earning negative real returns from traditional income sources paying historically low yields.
* Source: The 2011 Risks and Process of Retirement Survey, sponsored by the Society of Actuaries (SOA), March 2012.
Retirees spend disproportionately more on expenses that tend to increase the fastest
- Compared to those approaching retirement, the average retiree spends almost twice as much on health care - and less on transportation, education and other categories with low historic inflation.
- Advisors should factor in above-average inflation when planning a client's expenses, withdrawals and investments during retirement.
- For a well-rounded retirement portfolio, advisors should consider including a meaningful allocation to inflation protection strategies with the potential to deliver long-term real returns.
Risk-averse clients may be tempted to overweight conservative assets that have barely kept pace with inflation
- Due to rising life expectancies, many retirement-age investors may have long time horizons to pursue the inflation-beating potential of stocks.
- Individual asset classes respond differently to rising and falling inflation. Together, they may offer more protection and consistency than any one asset alone.
- Inflation-sensitive assets to consider for managing inflation include commodities, TIPs, real estate and equities related to natural resources and infrastructure.