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At CNBC’s Financial Advisors Summit, investment managers and financial experts said retirees and those planning to retire soon are most at risk from high inflation.
Inflation means that a dollar today can buy, on average, less groceries and other household items than it did a year ago.
Some inflation is expected in a healthy economy. But the prices of consumer goods and services are rising to their level Fastest pace in 40 years, The fast pace over the past several months has eroded household purchasing power faster than usual, which has been particularly challenging for those living on fixed incomes.
“The biggest risk is really the people who are retired,” said Nancy Davis, founder and managing partner of asset manager Quadratic Capital Management, of inflation.
Those who are working are still getting salary from their employer. their wages increased by 6.1% over the previous year – the fastest annual pace in at least 25 years, according to the Federal Reserve Bank of Atlanta. (Their data dates back to 1997.)
the job market has heated up, motivating businesses to increase wages. Although average worker wages haven’t kept pace with inflation (which stood at 8.6% in the year through May), some have outperformed.
But many retirees are no longer receiving a paycheck—they’re living on 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.
With regard to investments, retirees with enough cash are seeing a faster-than-normal decline in the value of that reserves due to inflation and nominal interest rates – Which means they have to withdraw more cash to meet their normal expenses.
Meanwhile, both stocks and bonds have fallen significantly this year. S&P 500 Index This week entered a “bear market” For the first time since March 2020. The dynamic makes it challenging for retirees (especially newly retired) to fund your lifestyle using your investment portfolio without risking financial shortfall later.
Relative to guaranteed income, Social Security provides annual cost of living adjustments. Recipients reported a 5.9% increase in profit this year, the biggest in nearly 40 years, but still lagging May’s inflation reading; next year’s adjustment could be more,
but most pensions Don’t Adjust Beneficiaries’ Income Upwards, Those that do typically increase profits by 2% to 3% each year — less than half the current pace of inflation.
In addition, Americans are generally living longer lives, which means their money should grow longer in retirement.
Therefore, according to financial advisors, many retirees should have at least some stock exposure in their investment portfolios, as stocks have greater long-term growth potential than assets such as bonds and cash.
But the recent market drop (and back in early 2020) shook many customers who sold stocks in favor of cash and haven’t bought back yet. louis barjasoPresident and Partner at MGO Wealth Advisors in Newport Beach, Calif.
So, we have to bring the money back into equity, said Barajas, a certified financial planner.
He added that for customers of all ages, inflation is having the biggest impact on their cash flows, which are in a “tough squeeze”. His interactions with concerned clients have focused largely on the basics: understanding their financial goals and knowing how much money they need.
“We are financial doctors right now,” Barajas said. “We’re holding our customers’ hands.”