What financial advisors are recommending as inflation hits record high 9.1%

By Doug Bailey

With inflation peaking at a new 40-year historic high of 9.1% today and financial worries mounting, InsuranceNewsNet checked in with a variety of financial planners, analysts, and consultants and asked two questions:

What impact does rising inflation have on retirement savings?
What investment strategies could be employed to cushion the blow for retirement accounts?

Here’s a sample of their responses.

“Inflation is kryptonite for retirement savings. In most cases, the investments in your retirement accounts aren't adjusted for inflation. So, over time, inflation reduces your 401(k)'s investment returns. That's why choosing assets that at least have a chance of beating inflation over time is essential. If you only invest in "safe" investments, like savings accounts, money market accounts, or CDs, your savings are practically guaranteed to lose purchasing power over time. Savers can minimize the pain by choosing assets that usually outperform the market during periods of high inflation, such as commodities, REITs, the S&P 500, gold, and TIPS (Treasury inflation-protected securities).” — Andrew Latham, CFP, managing editor at supermoney.com.

“While everyone feels the pinch of higher prices, the big impact is on those who don’t have a strategy to increase their retirement income over time to offset the higher prices. People who have rushed to safety (cash, fixed income, CDs, etc.) are being forced to spend the principal of their savings to keep up with the higher prices. Having a long-term plan and perspective can be the antidote to the poison of higher prices.” — John Shrewsbury, Co-Owner of GenWealth Financial Advisors

"The CPI report that released today had two important implications. The bond market is starting to price in a higher chance of recession and this inflation report only confirms that. While many people may overlook the significance of the 47 economists coming in below estimates for the second straight report, it's another data point that suggests something more troubling may be happening. Watch the yield curve as it has inverted even further after the CPI data was released. This is screaming a RECESSION caused by inflation response and is closer than most market strategists have been pricing in. What does all this mean for you, the consumer? It means that where inflation goes next is anyone's guess, but you should be prepared for all outcomes. Keep an eye on the yield curve and The Federal Reserve." - Josh Answers, Host "The Stock Market Live"

“Bonds will creep back into the investment mix as a viable source of inflation-adjusted yield, diminishing exposure to equities and equity-based ETFs. However, for advisors this raises a few other considerations. This moment is a clarion call to review thoroughly what clients are holding in their portfolios. Being invested in an S&P500 fund actually exposes clients to a significant growth position, which might not be suitable for all types of investors in the current environment. In the face of fundamental shifts happening in the market it’s as important as ever to know what you own, understand embedded risks, capture what you believe are the right exposures, assess the suitability of investments, pay the right price, and stay invested. ”Investors should consider tax loss harvesting, which can help offset the effects of inflation on investors' portfolios.” — Colin Gloeckler, CFA, chief strategist at Logicly.

“Some types of annuities offer retirees principal protection from market losses that typically occur during periods of high inflation, with potential earnings at or near the long-term rate of inflation. I believe one of the best types for retirees in the current environment is a special type of "Fixed Indexed Annuity" that uses a dynamic index adjusted monthly. Annuities of this type insure principal against market losses, while still providing the client the opportunity to earn interest credits when markets rise. The downside to annuities often involve limited liquidity, with a client only able to withdraw up to 10% per year. Another feature to consider and weigh carefully are any expenses that might be involved. While some annuities are available without fees, it is often useful to compare to other annuities that may charge a fee, but offer better net performance even after paying the fee.” —William Stack, financial analyst at Stack Financial Management.

“A properly diversified portfolio will have assets (select commodities and materials focused stocks) that will appreciate as inflation accelerates. The rest of the portfolio will most likely experience increased volatility and potentially large drawdowns. When the dust settles, retirement investments should be able to reinvest at higher fixed income rates as central banks look to raise rates in response to inflation. Know when you need the money you’re investing. Investing in a recession is usually a bumpy ride. If you are investing for retirement, the bumps shouldn’t matter. If you are investing for a trip to Paris next year, the bumps determine whether you’re flying to Paris, France or Paris, Texas. For investors 5 years or more away from retirement, recessions are like retirement sales. Get your retirement stocks while they’re on sale; don’t pay full price. If you can’t take the bumpy ride of the stock market, U.S. Treasury bonds are an alternative. They're called Defensive for a reason. Cash is an asset class. This is where you have to be honest with yourself. The worst thing you can do is get invested, lose some money, panic, and then go to cash. That is the definition of buying high and selling low. — Herman Thompson Jr. CFP, Innovative Financial Group.

“Inflationary periods can be tough on retirement savings accounts. The reason is simple: when inflation increases, the purchasing power of your money decreases. You need to re-evaluate how much you're saving for retirement and whether or not it's still worth it. One strategy for managing inflationary periods is to increase contributions to your retirement savings plan. If you have a 401k or 403b plan, you may be able to contribute more than your employer does by taking advantage of "matching" funds that your company matches with its own contributions (this is often referred to as a "401(k) match"). Anotherstrategy is to make sure you're keeping track of how much money you're spending on groceries, utilities, and other daily expenses so that you know if there's anything extra left over at the end of each month. This way, when the next paycheck comes in, there should be enough left over for an extra contribution into your retirement account.” — Jamie Knight, CEO, DataSource Hub.

“The effects of inflation on your retirement savings will depend on what you are doing with the money. Leaving your money to sit in a retirement account will be risky because it cannot outgrow the inflation rate. on the other hand, investing in your retirement savings can protect against inflation. Keep channeling money into your retirement savings account if you have experienced reduced income due to inflation. If your employer has a sponsored plan, continue contributing your money irrespective of inflation. Diversify your portfolio since some investments like TIPS are protected against inflation. Have a portfolio that includes both growth and value stocks and exchange-traded funds and mutual funds. Consider investing in company stocks that pay dividends regularly to control volatility.” — Bill Ryze, CFC, fiona.com

“It all depends on a person's commitment and whether their commitment is based on a budget or an actual tangible item or items - whether it's to coffee, eating out, or retirement savings. What I mean is, there are two ways to look at it. If a person is committed to a budget and spends 100.00 a month on coffee, well with high inflation, they will still spend 100.00 a month but get less coffee. Others will buy the same amount of coffee they were before inflation, but now end up spending more. If they get the same income, they are going to have to spend less and get less of something somewhere, and hopefully it's not the amount they put away for retirement savings. If a person is committed to a budget version or dollar amount of savings, then things in regards to money are the same, they will just get less of other tangible things, but their savings amount will still be the same. That is what a person should do in high inflation times, keep their strategy of saving the same amount, if not more, and receive less of all the other tangibles things that won't matter in a year. Does 10 coffees a month vs 12 really matter in a year from now? Probably not. Will the amount you save for retirement matter? Most likely. - Bob Chitrathorn, CFO/Vice President of Wealth Planning at Simplified Wealth Management

“The inflationary environment has caused severe corrections in the stock and bond markets. When that happens, investors get nervous and often make mistakes. There is a natural temptation to sell investments and wait until it is comfortable to reinvest. This almost never works. By the time investors who sold feel comfortable enough to re-enter the markets, much of the gain has likely been made back. As difficult as it is, the best move is to keep an age-appropriate level of risk in a diversified portfolio. Younger investors have both a challenge and opportunity now. The challenge is that inflation may be outpacing growth in their income and many live week-to-week. This may cause them to reduce the amount they are putting into their retirement accounts, especially when they see that value declining. The opportunity, however, is greatest for them since they have time and the power of compounding on their side. This is actually a good time to see if you can increase contributions to your retirement account since you are buying shares that are significantly cheaper than they were a few months ago.” — David Zavarelli, CFP.

“The impact has been devastating for some retirees. Over the past year the S&P 500 is down about 12%. Perhaps the hardest hit have been those on a fixed pension that does not change with inflation. These types of pensions have already lost more than 9% of their purchasing power in the last year. If inflation remains at just 5% for three more years, the cumulative loss of purchasing power on a fixed pension would be 26%. If 5% inflation stuck around for 10 years, the cumulative loss of purchasing power on the pension would be 78%. This means a $50,000 pension would be reduced to only $16,000 in real dollar terms. One of the best investments right now is Treasury Inflation Protected Securities (TIPS). The interest rate on these bonds has the annual inflation rate added to them. Because of this, investors can now get over 9% interest on TIPS bonds. Relative to bank accounts, which still barely pay above 0%, this is a great place to invest.” — Doug Carey, president, WealthTrace

“Simply put, this record-breaking inflation is something that retirees will have never experienced before. The value of their IRAs, 401(k)s and other accounts will be worth much less in the future, not only because of the taxes they will owe on their withdrawals of this money, but also the fact that the money will purchase less for them than it would today. Equities and stocks keep up with inflation, but the market is volatile and many believe it will continue to decline as the possibility of a recession looks more likely. Some fixed annuity products offer inflation riders that provide policyholders with guaranteed income payments that keep up with inflation. These will be extremely attractive for consumers who are both seeking guaranteed income of a regular basis and who are concerned about inflation.” — Ryan D. Brown, partner and attorney at CR Myers’s & Associates.

Doug Bailey is a journalist and freelance writer who lives outside of Boston. He can be reached at [email protected].