Investors are feeling the squeeze this year in the challenging environment of soaring inflation and rising interest rates. This year’s mid-year check-in with clients will likely be fraught with questions and worry, particularly for those who have seen their wealth and retirement planning impacted by the underperformance of stocks and bonds, and being able to speak to these concerns will be more important than ever.
Inflation Adjustments and Real Returns
Investors are feeling the pinch in their wallets across all areas of their lives as inflation has driven prices up. While current record inflation numbers are not expected to remain this high, planning for higher-than-normal inflation in the coming years and walking through different scenarios with clients could provide better understanding. This is particularly crucial for clients who are nearing retirement age, as cost of living increases will likely equate to greater retirement income needs. With many retirement income plans relying on real returns from investments, the need to assess those allocations and discuss alternatives in a changing economic and market regime could provide clarity and peace of mind for retirement clients in particular.
In a continued market of uncertainty, portfolios have experienced a lot of volatility. Being able to speak to the portfolio’s performance and range given the previous risk tolerance of clients, as well as assess clients’ comfort with their risk parameters looking ahead will allow for portfolio repositioning if necessary. This is a particularly meaningful exercise for those near or in retirement who may not have the time horizon to wait for recovery, particularly given growing recession concerns.
Sequence of Returns Risks for Retirement Plans
Between pandemic impacts in the last two years and the rising cost of living driven by inflation as well as the anticipated economic slowdown at a minimum, if not a full-on recession, retirement plans have been hit hard and have seen increasing numbers of withdrawals. For those clients at or near retirement, understanding the impact that these withdrawals have on retirement plans or retirement investments in the long term is critical. The “sequence of returns” risk means that early withdrawals of money from a retirement portfolio can equate to significant declines in that portfolio early on, drastically decreasing the portfolio’s ability to generate income in the long run.
When repositioning portfolios, many investors and advisors are allocating heavier to equities as an answer for the challenges that fixed income faces in a rising rate environment. Nationwide offers a suite of actively managed ETFs within equities for financial advisors. These funds include the Nationwide Nasdaq-100 Risk-Managed Income ETF (NUSI), the Nationwide S&P 500 Risk-Managed Income ETF (NSPI), the Nationwide Dow Jones Risk-Managed Income ETF (NDJI), and the Nationwide Russell 2000 Risk-Managed Income ETF (NTKI).
For more news, information, and strategy, visit the Retirement Income Channel.