Retirement Planning During High Inflation

In 2022, we witnessed inflation numbers that haven’t been around since the early 1980’s. When the decision comes to retire during a year with inflation this high, how are we supposed to plan? What are we supposed to think?

Retirement can be a whirlwind of emotions. Even though I am not currently retired, I have walked many clients through this and planned with folks for years to prepare them for it and have then watched them take the leap.

The outcome is always different; regardless of how financially prepared you are, the emotions of no longer working can yield many different reactions. Retirement is a hard transition that can be even more difficult in a high inflationary environment.

What are the risks to a retiree when inflation is high?

• One of the most challenging risks to your retirement is the sequence of return risk, which takes the time your portfolio returns happen and how it can help or hurt the longevity of your portfolio into consideration. Let’s say you retire when the market is down 15%, and you need to take withdrawals. Ultimately this will hurt the longevity of your portfolio. However, if you retire with returns up 15%, you can take withdrawals from your gains and thus increase the longevity of your portfolio.
• Inflation can be a factor that also forces the market to drop, and we witnessed as such in 2022 with negative returns in many areas of the market. Under these circumstances, the longevity of your retirement portfolio can be diminished if the sequencing of returns is negative due to market downturns. Inflation can also eat away at your purchasing power. If you were planning on spending $120,000 every year but now goods and services cost more, you now need to spend $125,000 to live the same lifestyle.
• High inflation forces the Federal Reserve into action, and in some cases, such action is a contraction of the economy. They do so in various ways, but mainly by trying to slow the supply of money. Much like what we saw in 2022, the Fed raised their rate targets which caused interest rates on debt to increase quickly. Purchasing a second property, downsizing in retirement, or even buying a new car will now look different when rates are higher than they were.

So if you’re planning to retire or are already retired, what are you supposed to do?

• First, find opportunities. When the Fed raises the target rates, safe assets such as money market funds, bank CDs, and short-term government bond yields go up, helping anyone sitting on cash or retirees looking for a place to park their short-term dollars. With inflation running hot, it might be a good time to reallocate your portfolio. Take this time to determine if one asset class has grown more than another. Now is when it might make sense to shift some around to buy the undervalued asset class.
• Think outside the box. Many sectors or certain types of investments will grow when inflation is high.
• Is it finally time to think about precious metals? What about art or other collectibles? There are new ways to invest in these areas without holding the asset.
• Have you heard of a buffered note? These can work very well in this market, seeing as the return is pegged to the stock market, which provides the possibility of upside, but also includes some downside protection. These are structured notes built using options contracts, which means when volatility is high, the terms are much more favorable. These are available through an RIA such as Wealthquest or ETF form.
• How about real estate or even farmland? Both asset classes are available for purchase through ETFs or other methods.

Most of all, do not panic. Money is deeply emotional already. When you have uncertain times, it can cause you to become even more reactive and make the wrong decision. Now is the time to speak to your financial planner and update the plan. Use their tools, such as the Monte Carlo simulator and update your probability of success. Check-in on your spending and saving. If you are still preparing for retirement, see this time as an opportunity to save in a market that is “on sale.” The big thing is to remember to control what you have control of and let the things go that are out of your control.

Who knows what 2023 will bring? In times like these, it is always good to take a deep breath, step back and analyze things logically. There are always opportunities, and financial plans should be flexible. Engage with your financial team to understand how to take advantage of these times. Your financial planner and tax advisor should be able to point you in the right direction. If Wealthquest can help with education or answers to questions, please email Adam Day at aday@wqcorp.com.

‍