Pascal Broze | ONOKY | Getty Images
Rising inflation has frightened many retirees who are now worried about outliving their savings.
The June consumer price index, which measures the cost of food, gasoline, housing, utilities and other goods, rose 0.9%, the largest one-month change since June 2008, the Labor Department reported Tuesday. Prices rose 5.4% year over year, the fastest increase in nearly 13 years.
Although Federal Reserve officials say these price hikes are temporary, many retirees are feeling the higher grocery and gas station costs, as well as other day-to-day living expenses.
“It’s high on the agenda for our clients,” said certified financial planner David Mullins, an investment advisor at David Mullins Wealth Management Group in Richlands, Virginia.
As older investors strive to maintain purchasing power, some experts suggest switching portfolios. Retirees need to know that.
While inflation has not sparked dramatic portfolio changes, since Q3 2020 Mullins has been looking to add “more breadth and depth across asset classes”.
In the past, many retirees have relied on portfolios made up of 60% stocks and 40% so-called fixed income assets, offering stable returns through bonds, money market funds, certificates of deposit and other investments.
Over the past few months, however, Mullins has been reviewing some of the 40% allocation to manage risk and generate higher returns through diversification.
“I think it’s really important that clients consider non-traditional asset classes,” he said.
More from Personal Finance:
Are you prepared for the tax implications of the $ 68 trillion wealth transfer?
“Inflation is the silent killer” as many retirees feel the sting
After the pandemic, the office is now getting a whole new look
For example, he has added commodities, which can include metals, agricultural products such as grains and pork, via a “broad basket index” instead of selecting sectors in addition to the allocations of gold.
“Commodities usually do well in inflationary environments,” he added.
He has also included inflation-linked treasury securities as well as an exposure to real estate, which may provide a hedge against inflation.
“When you think about what the stake in inflation could be if you survived your money, you have to play a little offensive,” said Mullins.
As bond yields decline, retirees must also change their attitudes towards conservative portfolios, said Linda Erickson, CFP and founding partner at Erickson Advisors in Greensboro, North Carolina.
While some retirees may have relied solely on bonds or certificates of deposit in the past, those options would no longer protect their long-term purchasing power, she said.
We’re not in a set-it-and-forget-it environment.
Linda Erickson
Founding partner at Erickson Advisors
“We have to build a portfolio that is actually growing faster than inflation, and we have to look at that every year,” she said. “We are not in a set-it-and-forget-it environment.”
To beat inflation, retirees may need to rely more on stocks, she said. For example, you might consider buying certain dividend-paying assets.
While the loss of purchasing power has been a concern for many retirees, not all advisors made changes to clients’ portfolios immediately.
“I have not switched portfolios this year because of impending inflation,” said Larry Luxenberg, CFP and founder of Lexington Avenue Capital Management in New City, New York.
Customer allocation can change when inflation “is deeper rooted than it was in the 1970s,” he said. However, he usually saves adjustments for changes in a customer’s financial situation.
Additionally, advisors like Christopher Flis, CFP and founder of Resilient Asset Management in Memphis, Tennessee, say they designed portfolios to protect clients’ long-term spending power. However, due to the recent price increases, there have been no notable shifts.
“You have to take your time before reacting to something that might be temporary,” he said.
