By now, we are all painfully aware that inflation did not turn out to be as “transitory” as Federal Reserve Chairman Jerome Powell predicted in early 2021. Even with the inflation rate gradually coming down since July 2022, it is remarkable to consider how quickly we moved from one of the lowest inflation rates in history to historic highs in the span of just two years.
It’s been more than 18 months since high and persistent inflation has become a part of everyday life, and it may be some time before it loosens its grip on the pocketbooks of American consumers, investors and retirees.
Many people saw their retirement account balances at least hold steady or increase over the past few years as equity markets delivered strong returns coming out of the pandemic. But 2022 was unkind to most investors, with extreme market volatility and major indices giving up many of their gains from the previous 12 months. So, it is logical for retirees to be concerned about inflation’s impact on their retirement plans.
Jackson recently conducted research to help identify where inflation stands, how it can impact investing and particularly, how retirees view inflation related to their saving and spending habits. The Inflation Perspectives study was conducted in partnership with Advanis and surveyed 360 retirees between the ages of 60 and 80 who were retired at least three years and had financial assets of $250,000 or more. Among the retirees polled, two of the top three inflation concerns cited related directly to inflation’s impact on investments.[i]
When asked how long they expected the current inflation period to last, almost two-thirds of retirees indicated at least one year or two. This is a view increasingly held by many economists and indicates the reality that inflation can be persistent at times.
Other questions revealed more of a disconnect between retirees’ views and how financial professionals might have responded to the same questions. For example, when asked to score their level of concern around inflation’s impact on prices compared to interest rates, 87% of retirees said they were at least somewhat concerned about prices, whereas only 60% were somewhat concerned about interest rates.
Investors making portfolio withdrawals and those working with a financial professional are significantly more worried about the impact of inflation on prices — even though the impact of interest rates on their portfolio value may be more substantive overall. At the same time, the research shows retirees may be unclear on the influence of inflation on prices, with 68% incorrectly estimating the inflation rate that will cause prices to double over the course of the average retirement.
The survey also revealed retirees’ belief that investment adjustments may be necessary to help protect portfolios from inflation. Equities and inflation-adjusted bonds are the most prevalent choices for inflation protection — though, surprisingly, 49% of respondents listed keeping their money in savings as one of their top three choices.
More than half of the surveyed retirees currently receive employer-provided guaranteed income, most likely in the form of pension payments. In addition, many retirees receive Social Security payments, which are the most widely recognized source of guaranteed retirement income. Yet, many pension plans pay a fixed monthly benefit, which can erode when inflation is high.
Having a trusted financial professional is key to weathering today’s high-price environment. There may be a need for some retirees to consider equity exposure to sustain and potentially grow their retirement assets as a means of softening the influence of inflation. One option to consider is the broad range of annuities available that can provide the flexibility and choice to help address changing economic conditions and evolving investor needs. These can involve supplementing retirement income, protecting principal or building a more diverse retirement portfolio. Optional riders available for an additional fee to that of the annuity make it possible to customize annuities to include benefits such as guaranteed lifetime income.
Annuities are long term, tax deferred vehicles designed for retirement. Variable annuities involve risk and may lose value. Earnings are taxable as ordinary income when distributed. Individuals may be subject to a 10% additional tax for withdrawals before age 59½ unless an exception to the tax is met.
The challenges retirees face during periods of high inflation can be more pronounced because their investment horizon to sustain and grow a portfolio is much shorter than when they were working. Fortunately, financial professionals can partner with clients to help make the necessary financial adjustments to soften the effects of inflation and protect their assets.
[i] Jackson’s Q1 Content Study, Inflation Perspectives, conducted in partnership with Advanis, surveyed 360 retirees between the ages of 60 and 80 who were retired at least three years and had financial assets of $250,000 or more. Data collected online between Feb. 14 and March 9, 2022.