As the debate goes on about which inflation index Social Security cost-of-living adjustments should be based on, the increased prices U.S. consumers are seeing at the gas pump, Home Depot and the grocery store have at least some advisors’ clients concerned.
Here are the top 10 things that Jamie Hopkins, managing partner of wealth solutions at Carson Group, and advisors told ThinkAdvisor their firms are telling their clients now about inflation and COLAs, and what other advisors should be telling their clients if they haven’t already done so.
1. Put the inflation we’re seeing in context.
When talking to clients, Carson Group advisors try to keep the “higher inflation numbers that we’re seeing right now in context with everything that’s going on in the world,” Hopkins said.
For instance, despite the rising consumer price index and inflation data, it’s important for advisors to point out that the prices of many products and services were down last year as a result of the COVID-19 pandemic, he said. With travel down last year, so were airline, hotel and other travel-related service prices, but the prices of used cars and rental cars have “spiked tremendously” this year, he noted.
Meanwhile, prices of many construction-related products are up significantly, and a lot of that is related to “supply-demand pressures” and supply chains getting disrupted, he added.
2. Tell your clients to keep their eyes on the Fed.
“Continue to watch what the Fed is doing” and point out to clients that the Federal Reserve is “not very concerned about inflation right now,” Hopkins advised.
The 3%-4% inflation we’ve seen lately, “while higher than we’ve experienced for a while, is actually pretty much in line with historical healthy inflation in the U.S.,” he said, adding: “We just went through a really long period of low inflation.”
3. Tell clients it’s important to make sure their income and assets are inflation-protected.
Talk with retired clients in particular about making sure their income and assets are inflation-protected, Hopkins said.
Social Security, “while it might not be perfect, has a very good cost-of-living adjustment measured in it,” he said. While the last Social Security COLA was just over 1%, the 2022 COLA might be 5% or 6%, he said. So tell clients that.
4. Explain that you have stress-tested clients’ financial plans and they’re on track.
It is important to stress test clients’ financial plans for various percentages of inflation, according to Hopkins. While a single year of 5%-6% inflation is “not the biggest issue in the world,” five to 10 years of over 3% inflation “when you are banking on 2% inflation is a really big deal,” he said. Again, explain all of this to clients.
Melissa Joy, a financial planning-focued wealth advisor and president of Pearl Planning in Dexter, Michigan, told ThinkAdvisor: “I’m discussing the inflation assumptions that I’ve been using for my clients in their financial planning analysis, so that can be comforting to clients — to understand that we have considered inflation in our financial plans.”
5. Discuss clients’ liquidity options.
For the clients of Douglas Boneparth, a financial advisor and president of Bone Fide Wealth in New York, “losing income is the single greatest threat to their financial lives, which is why we” talk to them and “make sure they have access to plenty of liquidity should they need to supplement or replace income for a certain period of time,” he said.