By: Kenneth Corbin, Barron’s featuring Vincent Birardi, CFP®, AIF®, Wealth Advisor at Halbert Hargrove
Last year, John LeRoy took on a client, a doctor, who had set September 2022 as his retirement date.
Since then, the client, nearing 70, has been watching as prices creep up, markets are roiled by war, and the Fed aims to avert spiraling inflation, risking a recession that some believe is inevitable. Like many clients these days, the doctor was concerned about his retirement plan.
“He called me, no surprise, a few weeks ago, and said, ‘John, can I still retire?’” recalls LeRoy, a principal at Summit Financial in Parsippany, N.J. “And I said, ‘If the recent events have caused us to have to make any shift in your retirement goals, then you should fire me, because I didn’t do my job.”
LeRoy, a certified financial planner, has an abiding faith in the strength and resilience of the plans he devises for clients who are looking ahead to their retirement.
Few CFPs would argue with that. But even if those retirement plans account for a multitude of external factors that can move markets, and are stress-tested to outlast periods of inflation, economic downturns, and global turmoil, that doesn’t always help clients sleep at night.
And in this moment, given that all those factors are in play, clients are worried that they won’t have enough to live comfortably after they exit the workforce.
“I would say that the biggest concern I’m hearing from our clients these days is just how will inflation impact their retirement,” says Leanna Devinney, branch leader of Fidelity’s office in Framingham, Mass.
Anxiety builds. Fidelity recently fielded a survey looking at investors’ retirement picture, and 71% of respondents said they were “very concerned” about the impact inflation will have on their retirement plans. About a third also expressed uncertainty about how their retirement savings can keep up with rising prices and reduced spending power.
The most widely cited inflation measure—the Consumer Price Index—was up 7.9% in February, compared to 1.7% last year. That contrast is stark, and the speed and severity of the price increases have taken some clients off guard, in considerable part because the current environment is unlike anything many clients have ever experienced as an adult.
“Unfortunately, we’re in an inflationary time where it’s the highest it’s been in 40 years,” Devinney says. “Prior to that when we would speak to clients it didn’t feel real how historically low of an [inflation] environment we’d been in.”
The immediate concern for clients becomes whether their savings will still go far enough to cover their spending plans in retirement—or their basic needs.
Vincent Birardi, an advisor with Halbert Hargrove, based in Long Beach, Calif., says his clients “understandably crave absolute certainty, especially in uncertain times,” but he stresses that the job of the advisor is not to sugarcoat the potential impact of macroeconomic conditions like inflation or the war in Ukraine.
“During tenuous times like the ones we’ve been currently living through it’s vitally important for us to acknowledge our clients’ concerns,” Birardi says. “Inflation is something that is central to many—and frankly all—of our recent client conversations, if for no other reason than we know that inflation decreases purchasing power.”
Portfolio shifts. Sameer Samana, senior global market strategist at Wells Fargo Investment Institute, has spent a lot of time recently studying inflation and evaluating asset classes that could help clients hedge against that risk.
He is looking favorably at shifting holdings toward what he calls “almost pro-inflation-type assets,” like commodities and midcap stocks, as well as sectors like energy, financials, and industrials. Samana also sees an upside in selective growth stocks, particularly those with niche intellectual property in areas like software and hardware, giving them a measure of specialization that could insulate them from the broader market forces.
The research firm Cerulli Associates recently surveyed target-date-fund managers, asking how they are responding to the erosion of real returns for investors caused by inflation. Nearly all of the respondents—96%—say that they are using Treasury Inflation-Protected Securities in at least one of their funds, while 32% are taking positions in commodities. A smaller—but growing—proportion (21%) of target-date-fund managers say they are allocating assets to direct real estate holdings, up from 13% in 2019, according to Cerulli.
Those types of allocation shifts are likely to continue, and perhaps to remain in place, as advisors and clients adjust to a baseline level of inflation that seems likely to hover above the sustained lows of recent years.
“It’s hard to see how inflation doesn’t stay somewhat higher than over the past decade,” Samana says. “If the Fed is serious and if inflation lingers longer than they would like, then it’s a situation where a rising fed funds rate along with rising inflation really is a headwind for both stocks and bonds.”
Advisors acknowledge that even the best crafted retirement plans must be adaptable. They have been running scenarios with saving and spending projections based on higher inflation rates. Devinney, who leads a Fidelity branch in a western suburb of Boston, is running models of 2.5% inflation for ordinary spending, and 4.9% for “northeast, urban healthcare costs” for healthy clients that are poised to spend many years in retirement.
Samana says advisors who have been running their models using inflation rates of 2% are inching that up to a 3% rate. Of course, in his role as a resource for Wells Fargo’s advisors, he well knows that statistical models are only one component of retirement planning, and that each client’s situation—and their attendant anxieties—is different.Inflation is likely to weigh more heavily on clients who are closer to (or already in) retirement than younger savers.
“It depends what phase of life you’re in,” he says. “Inflation means something very different for a 20-year-old than it does for a 65-to-70-year-old.”
More fears. It’s not just inflation that has clients concerned about their retirement picture these days. Worries abound that the Fed, in its efforts to keep inflation at bay, could help precipitate a recession. Businesses are reporting myriad challenges related to labor-market and supply-chain shortages. Then there is the month-old land war in Europe, which comes as the world is trying to shake off the latest wave of the pandemic and amid worries about yet another emergent strain.
That all adds up to a long, heavy list of what money people consider mere “headwinds,” but that can trigger anxiety for retirement savers. Stress over the dire headlines of the day can obscure the long-term plan they’ve worked out with their advisor, according to James Dubnansky, president of TriCoast Wealth Management in Baton Rouge, La., an LPL advisory practice.
“Half my job is just to get people to kind of disconnect from their emotions, feelings, what’s going on [in the world] and remember there’s a plan in place, and that it’s long-term,” Dubnansky says.
He reminds clients that in modern history, the typical recession is shortlived, leaving most savers with ample time for the markets to recover before they retire. “It doesn’t make sense to not ride it out,” Dubnansky says.
Cash appeal. Dubnansky and other advisors interviewed for this story have begun to think more seriously about their clients’ cash positions. On the one hand, holding cash seems counterintuitive in an inflationary environment. On the other, one can think of keeping cash on hand in a money market fund or some other stable, liquid environment as the ultimate hedge against volatility that is hitting both stock and bond markets.
Just how much cash to keep on the sidelines will vary based on the client’s appetite for risk and their time horizon for retirement, among other factors. LeRoy describes it as an exercise in “behavioral economics,” that his clients who have enough money to cover one- to two-years’ worth of expenses stored in a safe environment are better able to take jolts in the market in stride.
“Having extra cash around in challenging times just helps people take a breath and look intelligently at things, because short of that, seeing an entire portfolio moving 3% [or] 4% a day can deter you from your plan,” he says. “I’m a big proponent of having a plan that’s been developed over years, proactively, [but] it’s one thing to come up with a plan—the challenge is to stick to the plan, and the market has a tremendous ability to get people to move off the plan.”
Advisors often recount the routine challenges of trying to convince clients to look past immediate volatility or other market factors and focus on their long-term plan. With a storyline like inflation, where price increases are touching levels not seen in four decades, that can be a tough sell.
But with the turmoil emanating from Russia’s invasion of Ukraine, or even the pandemic itself, Devinney has an easier time, and she doesn’t have to go too far back to find a historical precedent.
“We’ll bring clients back to remembering where they were and how they felt” at the onset of the pandemic, Devinney said, recalling the heady days of spring 2020 when the markets tumbled after the initial wave of lockdowns, only to bounce back sooner than virtually anyone predicted.
“I think many would not have anticipated the stock market to recover as much as it did from March to May,” she says.
That experience, stacked on top of so many other market-moving events that seemed dire at the time but are barely a blip in the long-term upward trajectory of the stock market, allows advisors like LeRoy to sanguinely counsel clients: “The only thing that’s changed is the world around you.”
He’ll remind them not just about their plan, but what went into it—all the different scenarios he modeled to factor in high inflation, low returns, market volatility, and all the rest of it.