7 Inflation-Fighting Strategies for Clients in or Near Retirement
From: www.thinkadvisor.com
Inflation is at the highest level we’ve seen in decades. This has affected virtually all aspects of our economy and the finances of many Americans. A group of clients who could be especially susceptible to the impact of inflation are those in or near retirement.
Here are some strategies to help this group of clients combat the impact of inflation now and over time.
1. Review spending and withdrawals.
For clients in retirement, this is a good time to review their spending budget and to make adjustments to their retirement withdrawal strategy as appropriate. If there are areas in which they can cut back, this is a good time to do so. Anything that can be done to reduce distributions from retirement accounts without drastically affecting their quality of life is worth considering.
For those clients approaching retirement, this is a good time to suggest they take a hard look at their budget as they head into their retirement years. This can help make the transition from working to living on what might be a more limited budget easier. This can also help them conserve assets to deal with inflation in the coming years.
2. Contribute as much as possible to retirement plans.
This is a good time to ensure that clients approaching retirement are maximizing contributions to their retirement accounts heading into their final years of employment. Many of these clients are in their peak earning years, and contributions in the years leading up to retirement are still an important part of their retirement planning.
Clients who are working in some capacity in retirement, perhaps at their encore career, should also be encouraged to contribute to a retirement account. This may take the form of a self-employed retirement account such as a SEP-IRA or a Solo 401(k), an IRA or a workplace retirement account depending upon the situation. At this stage of life, a Roth account can make a lot of sense if they don’t need the upfront tax deduction.
3. Consider working a bit longer.
For clients approaching retirement, it might make sense to work a year or two longer than planned if they are on the fence regarding a firm retirement date. This delays their need to tap into their retirement accounts, allows an extra year or two of contributions to their 401(k) and can add to their Social Security earnings if they are in their peak earning years. This is obviously not the ideal situation for all clients and should be considered on a case-by-case basis.
For retired clients who are working part time or who have started their own business, these added earnings can help offset the need to tap retirement accounts and other assets for a few years.
4. Invest for growth.
Be sure that a reasonable portion of your client’s portfolio is invested for growth. For most clients, this means having an appropriate allocation to stocks. This is sound advice for all types of economic environments but especially for periods of high inflation.
It’s important to have an allocation for growth investments to help ensure that retired clients don’t outlive their assets. Their growth allocation might also include alternative assets such as gold or real estate that have traditionally been good hedges against inflation. For clients approaching retirement, it may be tempting to cut back on their growth allocation. It is important to impress upon them that retirement is simply a phase along the path of their life expectancy versus an event where everything changes all at once.
With many of your clients living longer, it’s vitally important that you build the opportunity to stay ahead of inflation into their asset allocation. Along with this, be sure to have a sufficient allocation to lower-risk, more liquid assets to meet their annual spending needs once clients reach retirement. The last thing they want to be faced with is having to sell stocks in a market downturn to fund current living expenses.
5. Plan for health care expenses.
Even under more normal inflationary conditions, health care costs are a major expense for retirees. Price inflation in prescription drugs and other types of medical care often outpaces the general rate of inflation.
Planning for health care expenses should be included in your planning for clients approaching retirement. This should include having them fund HSAs if they have access to one while still working. HSAs can be a huge help in funding Medicare premiums and expenses not covered by Medicare with tax-free withdrawals for qualified expenses.
For your clients who are retired, a review of Medicare or other coverage should be done annually to ensure they have the right coverage in place to help minimize their out-of-pocket expenses in light of their current needs.
In its annual survey, Fidelity Investments pegged the cost of health care for a couple aged 65 retiring in 2022 at $315,000 over the course of their retirement.
6. Delay claiming Social Security benefits.
Helping clients determine when to claim their Social Security benefits is always a critical planning issue for clients. It is especially important in inflationary times like these. Unless your client absolutely needs their benefits early, waiting as long as possible offers a couple of advantages.
First, delaying claiming their benefits allows them to claim a larger benefit in the future. This can result in a benefit that may be 25% to 35% higher by waiting until their full retirement age or even out to age 70 to claim their benefit versus claiming at age 62.
Second, 2022 saw the biggest cost-of-living increase in Social Security benefits since 1982, at 5.9%. The COLA for 2023 is again projected to be high. While all Social Security recipients receive these increases, the combination of these high COLAs and waiting a few years to claim their benefit can be a powerful combination for clients.
7. Consider TIPS and I-bonds.
The current environment of inflation coupled with higher interest rates is not a favorable one for fixed income investors. You might consider having clients in or near retirement move at least a portion of their fixed income allocation to Treasury inflation-protected securities (TIPS). The interest on these Treasury fixed income securities adjusts periodically in line with an inflation benchmark. Individual TIPS can be purchased directly from the Treasury. There are also a number of TIPS ETFs and mutual funds.
Treasury I-bonds have received a lot of favorable press during this bout of inflation and higher interest rates due to the high rate of interest they currently pay. The current interest rate is 9.62% on bonds purchased through October 2022. One of the downsides of I-bonds is that people are limited to purchasing $10,000 of them in a single year. Another is that they cannot be held in brokerage accounts. There is talk of raising the ceiling on annual purchases to $100,000 per person, which could make them even more attractive.
