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Retirees and those planning to retire soon are those most at risk from high inflation, investment managers and financial experts said at CNBC’s Financial Advisor Summit.
Inflation means that a dollar today can buy fewer groceries and other basics than a year ago, on average.
Some inflation is expected in a healthy economy. But the prices of consumer goods and services are rising at their fastest pace in 40 years. The frenetic pace of recent months has eroded household purchasing power faster than usual, which has been particularly difficult for people on fixed incomes.
“The biggest risk is actually those who are retired,” Nancy Davis, founder and managing partner of asset manager Quadratic Capital Management, said of inflation.
Working people still receive paychecks from their employers. Their salaries have risen 6.1% over the past year — the fastest annual rate in at least 25 years, according to the Federal Reserve Bank of Atlanta. (Their data is from 1997.)
The labor market has been hot, prompting companies to raise wages. Although workers’ average wages have not kept pace with inflation (which was 8.6% in the year to May), some have come out on top.
But many retirees no longer receive a paycheck — they live off income from their investments (in 401(k) plans and Individual Retirement Accounts, for example) and regular checks from sources like Social Security, pensions and annuities.
Compared to investments, retirees with ample cash are seeing the value of this stock decline faster than usual due to inflation and ridiculously low interest rates, which means they have to withdraw more money. to finance their usual expenses.
Meanwhile, stocks and bonds are both down significantly this year. The S&P 500 index entered a “bear market” this week for the first time since March 2020. The momentum makes it difficult for retirees (especially new retirees) to fund their lifestyles using their investment portfolio without risking a loss of earnings later.
Compared to the guaranteed income, social security offers an annual adjustment to the cost of living. Beneficiaries secured a 5.9% increase in benefits this year, which was the biggest in about 40 years, but still lags behind inflation in May; next year’s adjustment could be even higher.
But most pensions do not adjust beneficiaries’ income upwards. Those that do typically increase benefits by 2-3% each year, less than half the current rate of inflation.
Plus, Americans are generally living longer, which means their money needs to stretch out longer in retirement.
Therefore, many retirees should have at least some exposure to equities in their investment portfolios, as equities have greater long-term growth potential than assets like bonds and cash, according to financial advisers.
But the recent market slump (and that of early 2020) has spooked many clients, who have been selling stocks for cash and yet to redeem, according to Louis Barajas, president and partner at MGO Wealth Advisors at Newport Beach, California.
“So we have to reinvest the money in stocks,” said Barajas, a certified financial planner.
For customers of all ages, inflation has the biggest impact on their cash flow, which is under “tight pressure”, he said. His conversations with worried clients have largely focused on the essentials: understanding their financial goals and knowing how much money they need.
“We are financial therapists right now,” added Barajas. “We hold hands with our customers.”