Wealth Watch

Reshuffling Income Strategy

As inflation withers their wallets, clients’ review their planning goals

by Dylan Huang

Mr. Huang is head of retirement and wealth management solutions for New York Life. Visit www.newyorklife.com.

These days, the U.S. economy is leaving many Americans scratching their heads. In the wake of historic levels of inflation, all Americans are feeling the strain of higher prices, but retirees are often the most at risk.

With inflation at levels today not seen in the United States since 1982, many are withdrawing from savings to help pay for the increased costs of daily expenses. In fact, New York Life’s most recent Wealth Watch survey in August 2022 found that some adults have unexpectedly tapped their savings accounts to cover the higher costs of goods and services this year – to the tune of nearly $1,800. That figure is higher for Baby Boomers – nearly $2,300 – and about three in five retirees (61%) agree that inflation has impacted their retirement savings or strategy.

Economic Concerns Have Many Cutting Back

Higher costs due to inflation are causing many Americans to adjust their short- and long-term financial strategies. In the wake of mounting inflationary pressures, we’re seeing a focus on near-term financial priorities among American adults, who report making recent progress on financial goals such as maintaining a budget (54%), evening out monthly spending (46%), and eliminating debt (44%).

However, retirees appear to be divided on their approach to higher inflation. While New York Life’s research found that over half of retirees are making changes to their strategies and cutting back on lifestyle spending to keep up with higher costs of living due to inflation (55%), 42% of retirees reported that they aren’t looking to curb their spending.

Long-term Financial Strategies Remain Important

Still, these findings indicate an increased focus among retirees on maintaining a solid financial footing in the near-term as the economy continues to shift. Of those retirees adjusting their spending habits, substantial groups were cutting back on dining out (31%), nightlife (30%), and traveling (25%) as a result of inflation.

While cutting back on lifestyle activities is sometimes a necessary evil in challenging economic times, there appears to be a real awareness of building a secure financial future despite implementing short-term cutbacks. Even more encouraging is that many Americans are seeking financial advice to protect their long-term financial goals. In fact, around half of adults sought financial advice as of June this year (46%). Still, concern remains for older generations – especially retirees – that forgo financial advice during this time of economic turmoil.

Finding The Balance Between Now and Later

Fewer than a quarter of all adults say they are currently working with a financial professional to help them with their financial strategy (23%). For older generations, this can create financial headaches as they continue to age and concerns about outliving savings can become more significant.

Longevity risk is considered one of four big risks in retirement, along with withdrawal rate risk, sequence of returns risk, and inflation risk. However, inflation often gets the least attention in terms of its impact on retirement. Until recently, the economy experienced a long low-interest rate period that resulted in modest cost-of-living increases. But today, inflation continues to raise the prices of goods and services and seriously dents how far each dollar can go in retirement. If this level of inflation continues, retirees will have to continue to draw more from their accounts to pay for their basic needs and costs of living, placing them at risk of depleting their savings more quickly than previously planned.

Longevity risk is considered one of four big risks in retirement, along with withdrawal rate risk, sequence of returns risk, and inflation risk. However, inflation often gets the least attention in terms of its impact on retirement...

Working with a financial professional to develop a strategy that can help navigate an inflationary environment while ensuring a strong financial future is the best bet to help alleviate and manage these concerns. In addition, these are some steps retirees and those approaching retirement can take to help ease longevity concerns in this current period of high inflation:

1.) Stay the course: While it may feel like adapting your portfolio to a recession necessitates swift or extreme action, it’s often better the stay the course and stick to your strategy. Leveraging a relationship with a trusted financial professional can help you keep your anxieties in check and remember that high inflation or a recession is not all gloom and doom. Economic conditions impact different generations differently, and as in life, there’s usually a silver lining. In this case, the current economic climate and higher interest rates have been terrible for traditionally safe assets, like bonds, but it has enabled insured asset classes like annuities to offer higher guarantees.

2.) Ensure your strategy is customized for YOU: Challenging economic climates impact everyone, but not in the same way, and there’s no one-size-fits-all approach. Above all else, financial strategies should not be created once and never thought of again. Ever-changing market environments can sometimes mean making difficult choices, cutting back in one area to continue working towards a future goal. This is where a trusted financial professional can help. American adults report wanting financial products that provide growth (53%), reliability (51%), and protection (46%), yet more than two-fifths of adults (42%) say that they don’t know what financial products would be best for their current financial situation.

3.) Explore financial products that guarantee security: It’s important to ensure financial security regardless of market conditions so that when market downturns occur, you are already prepared. Financial products that provide that security, like life insurance solutions or guaranteed income solutions are an important piece of a holistic financial approach.

Understandably, inflation and a potential recession are on everyone’s mind, and as a result adults are reworking their financial strategies to figure out how to address what may come next. At New York Life, we often say that we can’t predict, but we can plan – and we ensure that our financial professionals are equipped to help clients navigate any economic climate. Rather than focusing on timing a recession, advisors should help clients understand and define their risk tolerance and incorporate protection solutions that both guard against a challenging market environment and set them up to prosper when conditions improve.

 

 

 

Polling for the August 2022 installment of the New York Life Wealth Watch survey was conducted between June 23 and June 24, 2022 among a national sample of 2,210 adults. The interviews were conducted online, and the data were weighted to approximate a target sample of adults based on gender, educational attainment, age, race, and region. Results from the full survey have a margin of error of plus or minus 2 percentage points
Polling for the May 2022 installment of the New York Life Wealth Watch survey was conducted between March 23 and March 25, 2022 among a national sample of 4,416 adults. The interviews were conducted online and the data were weighted to approximate a target sample of adults based on gender, educational attainment, age, race, and region. Results from the full survey have a margin of error of plus or minus 2 percentage points.

 

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