Inflation Poses the Biggest Risk to Retirement Goals – For Now

A new survey reveals a sentiment that’s a departure from the norm.


Illustration by RIA Intel

After a year of high inflation and volatile markets, advisors and their clients are worried about retirement outcomes — but some retirement experts caution against reading too much into the numbers over the long term.

A survey of 420 advisors from national, regional, independent, and bank broker-dealers found that 35 percent of advisors ranked inflation as the biggest threat to their clients’ retirement outcomes. The research was conducted on behalf of PGIM.

The sentiment expressed by respondents is a departure from the top concerns typically cited.

Jeremy Stempien, co-portfolio manager of the Prudential Day One Target Date Funds, says that given today’s environment, the answers aren’t surprising, but they do represent a slight reversal from the norm.

“The typical answers are longevity risk and market risk,” Stempien says.

Wade Pfau, a professor of retirement income at the American College of Financial Services in King of Prussia, Pa., says that high inflation is most likely temporary, and that advisors shouldn’t be overly concerned or change their advice strategy if long-term inflation stays near its projected 2.5 percent.

“Generally, over the long term, the stock market should be able to keep pace with inflation, just as earnings of companies grow alongside inflation,” Pfau says.

However, high inflation does have a real impact on retirees’ portfolios at the beginning of retirement. Pfau describes the first 10 years of retirement as “the fragile decade” — the period when market downturns have a greater impact because retirees often tap their savings to cover costs.

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“If there’s high inflation early in a person’s retirement, that permanently raises the cost of their retirement,” Pfau says.

David Stone, CEO of RetireOne, an insurance marketplace that services about 1,200 advisors, disagrees that advisor advice shouldn’t change in current inflationary markets.

“If you’re in retirement or approaching retirement, right now, you can’t worry about the next 10 to 20 years. You have to focus on what your portfolio is going to do this year, next year, and the year after,” Stone says.

The impact of high inflation is hitting what is already an insecure retirement population.

An alarming 70 percent of Americans at or near retirement age had less than $250,000 in savings, and only 22 percent of Americans surveyed in February felt they had saved enough for retirement. Inflation poses an added risk to retirees, said Stempien, because it erodes their real purchasing power just as they’re entering the second phase of their life.

In addition, during market declines, older investors intensify the issue because they tend to sell during periods of high volatility.

During the 2008–’09 financial crisis, investors in 2000-2010 TDFs sold out of those funds, which had spiked at more than $1 billion, according to a report by PGIM. At the start of the Covid pandemic, when uncertainty led to a steep market decline, net outflows in 2020 TDFs quadrupled from $1.6 billion per quarter to $6.6 billion in Q1.

According to PGIM, 65 percent of total DC plan contributions are invested in TDFs, with 91 percent of DC participants invested in them. Investors nearing retirement (55 and older) hold over half of total TDF assets.

Advisors who took part in PGIM’s survey believe that mitigating drawdowns in equity market selloffs is the most important duty that advisors (40 percent) have when selecting TDFs for their clients. Almost as important (37 percent) is protecting against longevity risks through an allocation to a lifetime income solution.

Well over half (68 percent) of advisors surveyed said they are likely to reevaluate TDF providers for their clients over the next 12 months.

Stone says RetireOne has seen a dramatic increase in interest from RIAs in annuities since the Fed started raising interest rates to combat inflation. “Back when rates were a couple of points, we would get one or two [fixed annuity requests] a month. Now we’re getting 10 to 15 per month,” Stone says.

Brian Seay, founding partner of The Capital Stewards, an Alabama-based RIA with $10 million in AUM, says that most people saving for retirement have a long-term investment horizon and are expected to live well into their 80s. While his clients are worried about inflation, his investment advice is to stick with a well-balanced and diversified portfolio.

His advice to other RIAs is to model out the impact of inflation for clients.

“Seeing the impact of inflation illustrated, and knowing that they’re going to be okay, is really impactful,” he says. “In most cases, even with inflation, they remain on track to accomplish their retirement goals.”

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