Inflation is proving that clients hitting their \u201cgolden years\u201d may actually need more gold in their portfolio than you projected.<\/p>\n
The recent spike in the price of goods and services has financial advisors refocusing the portfolios of clients in or near retirement, where predictable income is often a top concern. In this environment, many are stress-testing retirement plans under multiple inflation environments, instead of just assuming the normal 2% rate, said Matthew Smart, director of financial planning and portfolio analysis at WWM Investments.\u00a0<\/p>\n
\u201cThe old rules of thumb, like simple linear spending assumptions or fixed withdrawal frameworks, still provide a useful baseline, but they cannot be applied blindly,\u201d he said. \u201cRetirement planning has become much more dynamic and cash-flow driven than it was a decade ago.\u201d<\/p>\n
Inflated Prices, Deflated Retirements<\/p>\n
According to the most recent data, inflation, as measured by the Consumer Price Index, reached 3.8% in April, which compares to 3.3% in March, and represents the highest inflation rate since May 2023. While today\u2019s inflation is still less than half the historic levels of 2022, economists and market watchers are warning of higher inflation on the near horizon as the war in Iran continues to negatively impact global energy prices, among other concerns.<\/p>\n
For advisors like Smart, the two-pronged strategy involves keeping retirement portfolios on track and tamping down client anxiety. \u201cFrom an allocation standpoint, we continue to favor maintaining growth exposure longer into retirement, rather than becoming overly conservative too early,\u201d he said, adding that one of the biggest risks retirees face today isn\u2019t just volatility, but the long-term decline in purchasing power over a 20- to 30-year retirement.<\/p>\n
From a behavioral finance standpoint, Smart believes in keeping clients in the loop by putting things in perspective. \u201cThe biggest thing we try to communicate is that inflation compounds quietly over time, and most people dramatically underestimate what everyday expenses may look like 10, 15 or 20 years into retirement,\u201d he said. \u201cClient anxiety is often less about portfolio volatility itself and more about uncertainty around what it means for their actual lifestyle.\u201d<\/p>\n
Conversations with clients about rising prices may never have been more important than they are now, and should be started\u00a0 sooner rather than later, said Jay Coulter, chief executive officer of Titleist Asset Management. Having the uncomfortable conversation now beats \u201cwaiting for panic to set in,\u201d he added.\u00a0<\/p>\n
\u201cThe most important thing clients need to understand is that inflation does not announce itself with a single dramatic event; it works quietly over time, and a retiree who ignores it at 65 may not feel the full consequences until they are 78 and trying to cover medical expenses on a fixed income that has lost a third of its purchasing power,\u201d he said.<\/p>\n
One way Coulter plays defense against the threat of inflation is with allocations to real assets. \u201cI have always maintained some exposure to real assets in client portfolios because this asset class has historically preserved purchasing power when paper assets have not,\u201d he said. \u201cThe simplest allocation is to precious metals, specifically gold.\u201d<\/p>\n
Precious metals have long been viewed as a trusty inflation hedge, but that hedge can only go so far if other parts of a portfolio are out of balance, said Corey Voorman, president and founder of Voorman Investment Counsel.<\/p>\n
\u201cOur first layer of defense against inflation is the portfolio construction itself,\u201d he said. \u201cStocks tend to provide a meaningful hedge against inflation as companies can easily adjust the price of their products or services to keep in line with inflation, and prudent investors should consider exposure to precious metals as a diversifier.\u201d<\/p>\n
Citing gold\u2019s strong performance over the past few years (beating the S&P 500 Index over the past 1-, 3- and 5-year periods), Voorman warns against getting too bullish on the precious metal. \u201cGold should be handled with caution,\u201d he said. \u201cAs with any commodity, rapid corrections can occur and gold bullion currently sits at a near 15% drawdown from all-time-highs.\u201d<\/p>\n
The Inflation Fix<\/p>\n
Duane Ohly, senior portfolio manager at 1280 Financial Partners, is taking the longer-term view, which includes reduced exposure to fixed income.<\/p>\n
\u201cThe 60\/40 asset allocations of yesterday are now often closer to 70\/30,\u201d he said. \u201cBonds, which once served as a major foundation of asset allocation, are being displaced by alternative products and private investment sleeves designed to achieve long-term outcomes, protected growth and income, increased cash flows and reduced volatility.\u201d<\/p>\n
Because a big part of retirement planning involves longevity projections, the precise impact of inflation on a portfolio can be difficult to pinpoint, which is why most advisors prefer to err on the side of caution. \u201cInflation and longevity require us to educate clients about the impact they can have on a portfolio over an extended period of time,\u201d Ohly said. \u201cWe feel very comfortable planning around the 4% distribution rule, particularly as we try to achieve portfolio cash flows at, near or above that level in the overall portfolio.\u201d<\/p>\n
Forest Dutton, owner of Brightworks Financial Planning, approaches the inflation riddle by focusing on \u201cthe three As: assess, allocate and align.\u201d \u201cAssessing the individual impact can be very helpful in educating a client on inflation and also letting them know how it applies to their particular plan,\u201d he said. When it comes to allocating, regardless of the general direction of inflation, Dutton locks in to the historical 3% inflation rate, which makes an easier case for equities over the long term.<\/p>\n
Here\u2019s a TIPS. For clients who favor more fixed income, Dutton leans into Treasury Inflation Protected Securities. \u201cRisk exists on either side of inflation,\u201d he said. \u201cIf you\u2019re too conservative as you approach retirement, you risk the impact of inflation on your purchasing power, and if you\u2019re too risky on the equity side you are risking how much you will have to spend on goods and services over time.\u201d<\/p>\n
Kevin Feig, founder of Walk You To Wealth, also uses history as his guide when considering the long-term impact of inflation. \u201cI typically use a 2.5% inflation rate when working with clients, but we can easily run through multiple scenarios to help them understand the impact in different environments,\u201d he said. \u201cYou can\u2019t control the Fed or inflation, but you control asset diversification, savings rate and spending.\u201d<\/p>\n","protected":false},"excerpt":{"rendered":"Inflation is proving that clients hitting their \u201cgolden years\u201d may actually need more gold in their portfolio than…\n","protected":false},"author":2,"featured_media":711728,"comment_status":"","ping_status":"","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[14],"tags":[16987,45,49,48,94,133,2518,3242,392,135,131,132],"class_list":["post-711727","post","type-post","status-publish","format-standard","has-post-thumbnail","category-personal-finance","tag-asset-management","tag-business","tag-ca","tag-canada","tag-consumer-price-index","tag-finance","tag-financial-planning","tag-gold","tag-healthcare","tag-inflation","tag-personal-finance","tag-personalfinance"],"_links":{"self":[{"href":"https:\/\/www.newsbeep.com\/ca\/wp-json\/wp\/v2\/posts\/711727","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.newsbeep.com\/ca\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.newsbeep.com\/ca\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/ca\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/ca\/wp-json\/wp\/v2\/comments?post=711727"}],"version-history":[{"count":0,"href":"https:\/\/www.newsbeep.com\/ca\/wp-json\/wp\/v2\/posts\/711727\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/ca\/wp-json\/wp\/v2\/media\/711728"}],"wp:attachment":[{"href":"https:\/\/www.newsbeep.com\/ca\/wp-json\/wp\/v2\/media?parent=711727"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.newsbeep.com\/ca\/wp-json\/wp\/v2\/categories?post=711727"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.newsbeep.com\/ca\/wp-json\/wp\/v2\/tags?post=711727"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}