Inflation Isn’t Retiring Anytime Soon. Your Clients Should Be

Inflation is proving that clients hitting their “golden years” may actually need more gold in their portfolio than you projected.

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. 

“The old rules of thumb, like simple linear spending assumptions or fixed withdrawal frameworks, still provide a useful baseline, but they cannot be applied blindly,” he said. “Retirement planning has become much more dynamic and cash-flow driven than it was a decade ago.”

Inflated Prices, Deflated Retirements

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’s 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.

For advisors like Smart, the two-pronged strategy involves keeping retirement portfolios on track and tamping down client anxiety. “From an allocation standpoint, we continue to favor maintaining growth exposure longer into retirement, rather than becoming overly conservative too early,” he said, adding that one of the biggest risks retirees face today isn’t just volatility, but the long-term decline in purchasing power over a 20- to 30-year retirement.

From a behavioral finance standpoint, Smart believes in keeping clients in the loop by putting things in perspective. “The 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,” he said. “Client anxiety is often less about portfolio volatility itself and more about uncertainty around what it means for their actual lifestyle.”

Inflation’s Favorite Shiny Metal

Conversations with clients about rising prices may never have been more important than they are now, and should be started  sooner rather than later, said Jay Coulter, chief executive officer of Titleist Asset Management. Having the uncomfortable conversation now beats “waiting for panic to set in,” he added. 

“The 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,” he said.

One way Coulter plays defense against the threat of inflation is with allocations to real assets. “I 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,” he said. “The simplest allocation is to precious metals, specifically gold.”

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.

“Our first layer of defense against inflation is the portfolio construction itself,” he said. “Stocks 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.”

Citing gold’s 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. “Gold should be handled with caution,” he said. “As with any commodity, rapid corrections can occur and gold bullion currently sits at a near 15% drawdown from all-time-highs.”

The Inflation Fix

Duane Ohly, senior portfolio manager at 1280 Financial Partners, is taking the longer-term view, which includes reduced exposure to fixed income.

“The 60/40 asset allocations of yesterday are now often closer to 70/30,” he said. “Bonds, 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.”

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. “Inflation and longevity require us to educate clients about the impact they can have on a portfolio over an extended period of time,” Ohly said. “We 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.”

Forest Dutton, owner of Brightworks Financial Planning, approaches the inflation riddle by focusing on “the three As: assess, allocate and align.” “Assessing 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,” 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.

Here’s a TIPS. For clients who favor more fixed income, Dutton leans into Treasury Inflation Protected Securities. “Risk exists on either side of inflation,” he said. “If you’re too conservative as you approach retirement, you risk the impact of inflation on your purchasing power, and if you’re too risky on the equity side you are risking how much you will have to spend on goods and services over time.”

Kevin Feig, founder of Walk You To Wealth, also uses history as his guide when considering the long-term impact of inflation. “I 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,” he said. “You can’t control the Fed or inflation, but you control asset diversification, savings rate and spending.”