Inflation Is Drag on Retirees, But Its Impact Varies

One of the few certainties in the financial advisory is that inflation is onerous for clients. That lesson is being retaught this year, but as advisors know, soaring consumer costs affect different clients in varying fashions.

Obviously, inflation is a drag and troublesome to advisors and clients alike, but there's also plenty of opportunity to bolster engagement thanks to inflationary pressure. In fact, the current environment is ripe of advisor/client engagement regarding inflation because it’s been so long – reportedly four decades – since clients contended with an earnest inflationary climate.

Many clients weren’t investing during the last bout of inflation comparable to current one. When advisors think about it, the number of clients in that position is likely expansive because inflation is currently running at its highest levels in four decades, indicating that basically all clients that are Gen X and younger are experiencing their first bout with prolonged inflation.

What’s interesting about this era of rising consumer prices as it pertains to retirement – and this underscores opportunity for advisors – is data suggesting many folks are surprisingly confident in their retirement outlooks. The recent Retirement Confidence Survey by the Employee Benefit Research Institute indicates 80% of those polled are confident they have enough savings to maintain a high quality of life in retirement while a third are very confident on that issue.

Encouraging, But Surprising

It’s certainly positive that folks are confident or very confident about their retirement outlooks, but it’s also surprising given the aforementioned inflationary pressures.

As for those that aren’t so optimistic about retirement, the EBRI turns up some unsurprising though still important data points.

“Those who are less confident cite inflation as their number-one concern. That reflects the current headlines about very high inflation rates, of course, although even moderate inflation is always an important factor in retirement plans. The spending power of $100—assuming an inflation rate of 2%—would be just $164 at the end of a 25-year retirement,” notes Morningstar’s Mark Miller.

Another point to ponder is healthcare costs. Interestingly, some of those in the inflation is transitory camp are also the folks saying “at least healthcare costs aren’t rising on par with gas and food.” Data confirm that is the case, but this scenario could change and do so without notice.

Moreover, advisors should be engaging clients on what their healthcare saving picture looks like. Are ta-advantaged health savings accounts (HSAs) part of the equation? Is long-term care planned for? Again, this healthcare costs in retirement, regardless of inflation, affect clients to varying degrees.

“Moreover, rising healthcare costs can be ruinous for lower-income households. Half of Medicare enrollees had income below $29,650 in 2019, and one in four was living on less than $17,000. Many struggle to meet basic needs, especially in high-cost parts of the country,” adds Miller.

Planning for Lengthy Inflation

The unfortunate reality of what advisors and clients are contending with today is that economists and some folks in the federal government badly mischaracterized inflation as transitory. It’s proven to be anything but that, indicating that those attempting to pinpoint when inflation will ease are likely running a fool’s errand.

“JPMorgan notes that annual inflation averaged 2.7% from 1982 to 2020, and then it ran at a 7.1% pace in 2021. It’s quite possible that figure will be even higher this year. For example, the Senior Citizens League forecasts that this year’s COLA could be 8.6% if current inflation trends persist for the rest of the year.”

Bottom line: With each client’s financial situation different from another’s, advisors can’t take one-size-fits-all approaches to buffering against inflation in retirement. However, one area that advisors can hone in on with some uniformity is healthcare. Inflationary pressures on food, gas and other items will eventually ease, but the long-term trend for healthcare costs is higher and that’s unlikely to be interrupted anytime soon.

Related: How Investors Are Dealing With Inflation