Inflation and Market Volatility Create the Perfect Storm

Stonebriar Financial addresses the challenges created by inflation and market volatility in the current economic environment.

PROVO, Utah, Aug. 16, 2022 /PRNewswire/ -- Inflation and Market Volatility Create the Perfect Storm.

According to Gary Preisser, president of Stonebriar Financial in Utah, financial advisers help clients face different types of challenges. Currently, two of the most difficult challenges are market downturn and inflation.

Although there are many feeling the effects of inflation, those that are still employed have hope that an increase in wages can lessen the impact of rising costs. But for those already in retirement, the situation is completely different. For many retirees, inflation is eroding the hard-earned income that they spent decades to build

The primary source of income in retirement has been, and currently continues to be, social security. For 2022, the SSA made a cost-of-living adjustment of 5.9%, the highest increase in almost 40 years. That may seem encouraging. But keep in mind that the government rarely, if ever, gives anything to taxpayers out of the kindness of their heart. Many believe, the only reason the adjustment was that high is because the actual inflation rate was even higher – 7%. That means that even though the amount of the social security checks might be higher, their purchasing power decreased. And that is assuming the amounts did increase. For many, rising costs of Medicare resulted in reduced net income from Social Security. Increased Medicare Costs for 2022 – A Look Behind the Numbers (medicareadvocacy.org)

The unfortunate reality is that Social Security increases have always and likely will always lag inflation rates. This could leave retirees with less value for their hard-earned benefits year after year. Even if inflation goes away quickly, it could still affect income for retirees for years, if not decades.

Hopefully, Social Security is not the only source of income in retirement. High rates of inflation typically correlate with growth in the stock market, or so we hope. In the long run, that should give investors a hedge against inflation. But timing is everything. For workers that have time to let their assets grow, the volatility of the market should trend higher than inflation.

For retirees however, the outlook is much different. Most of these individuals are not investing for growth. They are investing for income. Each downturn in the market is exacerbated when assets are being withdrawn to supplement monthly income. Even those that don't need to dip into their retirement accounts on a monthly basis are not given the choice thanks to required minimum distributions from 401ks and traditional IRAs. 

Making matters worse is the type of investments many have in their portfolios. The general rule of thumb has long been to reduce volatility by shifting assets from equities to bonds as investors get closer to retirement. Typically, lower volatility yields lower growth, even in good markets. The question many are asking - With rising interest rates, can bonds really be relied upon to keep up with inflation? With minimal growth even in good times, it seems unlikely.

What can retirees do to overcome the challenges that accompany inflation? Hoping it goes away is not the answer. Whatever measures taken to reduce inflation in the short term are likely to negatively affect other aspects of the economy. For example, rising interest rates have lowered bond values and have started to slow the booming real estate market. The Effects of Rising Interest Rates on Real Estate | Fundrise

Given the likelihood that inflation, to some degree, will continue for the long term, retirees need a plan to do the following:

1. Avoid losses – There is never a good time to endure losses in your portfolio. With rising inflation, losses have an even greater impact for most than they normally would. Safe options, such as cash or fixed CDs, can protect from market loss but do not keep pace with inflation due to their lack of growth potential.
2. Find growth in, or through, the market – Bonds may not be a reliable source of growth but there are still investment opportunities in the markets, even with low risk. The key is to find performance relative to the benchmark. The first step is to analysis your current portfolio for risk and performance. Then seek out opportunities for improvement. Some investments offer growth tied to the market without investing in the market, while still protecting from potential losses.
3. Reduce taxes – Taxes make everything worse. When markets are up, capital gains taxes are higher and your growth is diluted. When markets are down, taxes can increase the impact of losses. And it will get worse when the current tax cuts expire in a few short years. Now may be the time to consider shifting investments from tax deferred accounts into accounts that offer tax free growth such as a Roth IRA. This will also reduce the potential impact of RMDs and offer more control over future taxation.

There is no "one size fits all" solution that will work for every situation. Each individual and family is different, and they should plan according to their needs. The key is to have a plan. Pretending that inflation doesn't exist or hoping that it goes away will not fix the problem. Evaluating investments from a risk and tax perspective will provide the information needed to be successful in any economy.

Stonebriar Financial and Kinetic Investment Management, Inc. are two separate entities. Insurance products and services are offered and sold through individually licensed and appointed agents in all appropriate jurisdictions under Stonebriar Financial. Investment Advisory Services are offered through Kinetic Investment Management, Inc., a registered investment adviser.

Media Contact:
Omar Velazquez
Direct Line: (213) 328-2313
[email protected] 

SOURCE Stonebriar Financial