Name: Retirement Planning with Inflation In Mind
Uploaded: 2024-04-29T19:57:00Z
Duration: 13 min 36 s
Description: As we enter an era of structrually higher inflation we'll speak with market strategists and investors about coping with price growth, and explore the best ways to manage inflation's impact in a retirement portfolio.

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As we enter an era of structrually higher inflation we'll speak with market strategists and investors about coping with price growth, and explore the best ways to manage inflation's impact in a retirement portfolio.

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Retirement Planning with Inflation In Mind

Hello everybody, and welcome. Even though inflation peaked in June, 2022 at a 40-year high, it's still top of mind when it comes to planning for retirement. Here to discuss the challenges of inflation risk and the planning strategies to help combat dynamic economic conditions, we have Glen Franklin. Thanks for being here with us today, Glen.

Raakhee, thanks for having me.

Glen, even though inflation is cooled, what are you seeing as the consumer's perception of the current inflationary environment?

Yeah, so this is our second installment in the Jackson Security and Retirement Series, which we're doing in partnership with the Center for Retirement Research at Boston College. We talked to both consumers and financial professionals about the impact of rising prices and higher interest rates on household budgets, on financial planning, and their general perception of the economy. What we found is that people are generally pessimistic. 49% said they had a level of pessimism around their financial security outlook, versus 17% who said that they had some level of positive outlook. And also one of the things that is important to note, the timing of the study. So we were in field in October of last year, October, 2023, the S&P had taken a dip, the interest rates had jumped up a little bit, so that could be part of amplifying the pessimism. But also in the study, we looked at people who were following financial news closely and we asked them what their major news sources were. One of the things that we found is that if there was any sort of bias in the news sources they were consuming, that was reflected in their perceptions.

Where are you finding that people are sort of accurately gauging inflation rates though, or are there misconceptions?

Yeah, about half of the people we spoke with, this is consumers, were somewhere in the ballpark, so around the 3.2% rate that was published around October of last year. But the other half, some of them were saying it was as low as 1%. Many of them were saying that it was up to 10% or more. In fact, 15% thought it was higher than 8%. And we think that that is in part, due to the news sources, but also the headline CPI. So economists like it, it's a broad basket of goods, but if you look at just gas, food at home, and rent for example, those peaked at 20% in 2022, more than double the headline rate. So there could be a little bit of pessimism being driven by that as well, and skewed perception.

Is it fair to say, "Do you think that pre-retirees are feeling the pressures of inflation more than current retirees then?"

You know, it's surprisingly, yes. Surprising, because conventional wisdom says that retirees on a fixed income would be the ones that would feel the pinch most from rising prices and rising interest rates. But what we found was 41% of pre-retirees said they had a negative impact from those conditions versus only 29% of retirees. And on the flip side, 45% of retirees were saying they didn't really see any impact, and only 27% of pre-retirees were reporting that they didn't have impact. We think in part, that's due to the conventional wisdom, looking at the wrong side of the income statement in a household. It's not so much about fixed expenses, oh, excuse me, fixed income. In fact, in reality, even if you're still working, your income's pretty fixed, it's not like most people would go out and find more income that easily. So we look at the expense side and we believe retirees just have more flexibility in their expenses. They can restructure their household budgets more easily. Pre-retirees have more responsibilities, and so it makes it more difficult for them, in fact, to respond to rising prices and higher interest rates.

So Glen, tell me, do you think that financial professionals and consumers are aligned on the predictions of future inflation?

You know, just like we saw in longevity, financial professionals tend to be anchored around the true values of the metric, in this case, the CPI. So they were really clustered around 2 to 3%. Consumers, as I said, half of them were ranging between 1% on the low side, over 10% on the high side. So there is a good degree of misalignment, and potentially benefit from people getting advice from financial professionals because they have a more reasoned view on the matter.

So how do you think then that's sort of impacting and affecting people's behaviors and their perspective on retirement planning?

Yeah, that's a good question. So one of the things that could happen, if you're thinking that the economy is going to perform poorly, that might drive an investment strategy with suboptimal returns. If you think, for example, that things are going to be troubled, if you will, for the next year, well, that would drive higher interest rates, that would drive potentially investing in defensive stocks as opposed to growth stocks. It might cause you to invest in fixed income thinking interest rates are gonna stay higher than they actually will. And it also may have you thinking you need to delay retirement, that you're going to work longer than you can. And one of the things we've seen across many of the studies that we've done on this topic, people retire earlier than they planned far more often than they work longer than they expect to. And there's also a notion that maybe I'll work in retirement. So once I retired, I'll continue working. That's really not the case. We've seen in previous studies, 50% of pre-retirees thought that they would work in retirement, and when we asked retirees how many were working, it was about 1%.

Wow, Glen, tell me, what are financial advisors recommending as sort of successful tools to help combat that inflation risk in their client portfolios?

Yeah, well, so we ask a range of different investment strategies that they might recommend to their clients to address rising prices. 84% of financial advisors said that they are using diversification in their client's portfolio to address rising prices. So specifically, changing the blend of asset classes that they have in the portfolio. There's a little bit of a challenge with that because inflation's a market-level risk, that's systematic, diversification is the strategy for dealing with non-systematic risk. Really the best strategy for market-level risk is getting a guarantee in place. That guarantee could be an insurance-based solution, it could be through options or hedging. And the good news is the second and third most prevalent options were annuity-based solutions with guarantees in the mid '50s, in fact, for both an annuity with a guaranteed income stream or an annuity that guarantees minimal or no investment losses. So they are seeking those for their clients, but diversification still is the leading option they're choosing.

Glen, is the data showing other benefits for clients working with financial professionals when it comes to retirement strategies?

It is, so how we did the study was surveys to both consumers and financial professionals. In the study with financial professionals, we decided to ask them, not only, "What are you advising your clients?" But "What are you, yourself, doing in your personal household and in your personal portfolio?" Then with consumers, we asked them if they were receiving advice from a financial professional or not. So we had three populations we could look at: Financial professionals themselves, advised households, and unadvised households. What we found is that financial professionals themselves, reported the least impact to their household budgets. We ask about a variety of different activities that you might respond in rising in prices like eating out less often, shopping at discount stores, buying off-brand items, and so on. And they, across the board, reported doing less of that than consumers in general. But what we also found is that consumers in advised households were largely in the same place as financial professionals, lower impact across the board. In unadvised households on the other hand, it demonstrated significant impact on those activities. The flip side is, with rising prices, increasing interest rates, you wanna change your investment strategy as well. And what we saw there across those three groups is financial professionals were modifying their asset allocations. The good news is they were advising their clients to do the same thing. So advised households were reporting effectively the same reallocation strategy, but unadvised households, by and large, weren't doing anything to respond to the macroeconomic environment. So there are a number of benefits involved in having advice in your life. In addition, we talked to them about the consumers, about their household savings. And in fact, households with financial planners were saving more in 2023 than households without. And over the course of the three year period, 2021, '22, '23, advised households saw a smaller drop in their savings, only 2% as a percentage of income versus unadvised households, which had a drop of 4% or double.

Wow, so Glen, tell me, from a financial, professional perspective, right, are there any sort of missed opportunities that could be taken advantage of in terms of folks helping their clients navigate inflation risks?

Yeah, I think there are. So one is, we ask consumers, "Are you receiving advice from your financial advisor around how to adapt in this environment?" 54% said no. The interesting thing is, those that said yes, were the ones that reported the least impact from rising prices. So there is value to that advice, but half of advisors are not providing that advice. So there's an opportunity to give advice, not just on the long-term strategies and investment management, but also on day-to-day budgeting and money management issues. Also, it's interesting, we ask people that are participating in the studies, what your gender is and whether you participate in household financial decision making. If you don't participate in household decision making, we don't let you into the study. So we really wanna get people that are informed about choices. Then we look at whether you are leading decision making, participating in it, being consultant, or equal partnership. And we found that there were vast differences among female, male, and equal partnership households. So that's another area where advisors might be able to help their clients more effectively.

Glen, I know it's been a tough environment for a lot of folks, and so I'm interested in what do you see as a positive aspect of the current environment?

Yeah, there's a couple of things that I think are really positive that are going on right now. For two decades, fixed investments have not been an option. I mean, interest rates have been near zero. They're at high numbers, ostensibly, but there's a benefit. In fact, people that are saving are saying, "I'm loving this interest rate environment 'cause for the first time, I have investment choices beyond just equities in order to grow my money in a sustainable way." So fixed income investments, that's a good news story. Second thing is, we've seen the S&P 500 grow over the past year. It's tapered off certainly, in the recent weeks, but it's a type of growth that is supported by fundamentals. I don't think there is a bubble going on, for example. And so there's good news on the equity front as well with regard to how we would allocate our money across our different asset classes.

Well, Glen, I wish we had more time, but that is our time for today. Thank you so much for your insightful comments.

My pleasure, thank you.

Retirement Planning with Inflation In Mind

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