My goal as a financial advisor is to prepare my clients for their financial needs through various market environments. Over my thirty plus year career, I have guided clients through the great financial crisis, the tech wreck, and the Covid-19 Pandemic. Today we find ourselves on the brink of a looming recession, high interest rates, soaring inflation, regional bank concerns, and government debt default risk.
There are a few reasons why your financial plan may need to be adjusted to account for the high inflationary environment specifically. The three key aspects that come into focus when inflation remains elevated are reduced purchasing power, increased expenses, and lower investment returns.
We look at purchasing power because inflation erodes the purchasing power of your money over time, meaning that the same amount of money will buy fewer goods and services in the future than it can today. This can be especially problematic for retirees who are on a fixed income because they may not have the ability to earn more money to compensate for the increased cost of living.
The second problem with high inflation is increased expenses. You probably have noticed your cost of goods and services has gone up. This change may be most significant around larger expenses like healthcare, housing, and food, all of which can put a considerable strain on your retirement savings.
I often hear clients say, “I need to redo my budget to account for increased prices, especially groceries and monthly bills”. I see that clients are more concerned over their near-term expenses rather than longer-term financial strategy. It is my job to help clients stick to their financial game plan and adjust when their long-term goals or unexpected cash outflows meaningfully change.
Lastly, lower investment returns due to inflation will likely impact the real returns on investments. For example, if inflation rises, the returns on fixed-income investments like bonds may not keep up with inflation, which would result in lower real returns on that investment.
Inflation-protected securities, such as Treasury Inflation-Protected Securities (TIPS), are designed to keep pace with inflation, so they can be a good option for retirees looking to protect their purchasing power. Diversifying your portfolio across asset classes and investment strategies can help you manage risk and potentially generate higher returns over time.
It is important to consider the potential impact of inflation, expense increases, and potentially lower returns when creating a retirement plan. Working with a financial advisor can be crucial to creating a retirement plan that considers the potential impact of these 3 key aspects, among many others that can impact one’s retirement plans.
Jason Katz is a Financial Advisor with UBS Financial Services Inc. a subsidiary of UBS Group AG. Member FINRA/SIPC in 1285 Avenue of the Americas, New York, NY 10019. The information contained in this article is not a solicitation to purchase or sell investments. Any information presented is general in nature and not intended to provide individually tailored investment advice. The strategies and/or investments referenced may not be suitable for all investors as the appropriateness of a particular investment or strategy will depend on an investor’s individual circumstances and objectives. Investing involves risks and there is always the potential of losing money when you invest. The views expressed herein are those of the author and may not necessarily reflect the views of UBS Financial Services Inc Neither UBS Financial Services Inc. nor its employees (including its Financial Advisors) provide tax or legal advice. You should consult with your legal counsel and/or your accountant or tax professional regarding the legal or tax implications of a particular suggestion, strategy, or investment, including any estate planning strategies, before you invest or implement.
Asset allocation and diversification strategies do not guarantee profit and may not protect against loss.
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