Close Close
Popular Financial Topics Discover relevant content from across the suite of ALM legal publications From the Industry More content from ThinkAdvisor and select sponsors Investment Advisor Issue Gallery Read digital editions of Investment Advisor Magazine Tax Facts Get clear, current, and reliable answers to pressing tax questions
Luminaries Awards

Life Health > Annuities > Fixed Annuities

6 Ways to Fight the Return of Inflation

Your article was successfully shared with the contacts you provided.

What You Need to Know

  • Clients should find ways to make use of low interest rates while they’re still here.
  • Commodities and commodity-related stocks could be hot.
  • Buying annuities can be a way for clients to prepare to use more of their resources to buy higher-return, higher-risk assets.

You remember inflation, don’t you? If you were an adult in the mid-1870s and early 1980s, you learned to deal with it in your everyday decisions.

Guess what? It’s time to dust off those skills you developed back then. Most people believe inflation is back in a major way and not just for a “transitory” time period. Consumers are having to deal with the ravages of this silent “tax” on their financial resources. For many adults this is their first introduction to real inflation and how it impacts money decisions.

In my view, if, as a society, we decide to raise operating costs by increasing employee compensation and increasing taxes on a portion of companies, you would expect cost increases to be passed along to consumers. Now you add to that taking actions to introduce a much more robust social safety net and migrating to a “green energy” economy, while adapting to the costs of the COVID -19 pandemic, you would expect prices to increase. It looks to me that a lot of these price increases are a permanent part of the costs of the goods and services we purchase.

Inflation is defined as the decline of your purchasing power over time. The rise in the general level of prices, often expressed as a percentage, means that the dollar buys less than it did in prior periods. In reality, the result of inflation is an increase in the cost of goods and services. To deal with the negative impact of inflation it comes down to whether incomes increase at the same rate as inflation does so that households can at least remain level with the changes in prices. Most of our incomes are not increasing to offset the large price rises we are experiencing. Inflation eats away at cash budgets and lifestyles because over time consumers need to pay more for what they need. All of this economic change has bewildered consumers who are experiencing significant inflation for the first time and are looking for answers on how to best deal with it. Inflation is a whole new dynamic impacting their financial lives.

Here are six actions that can be taken to offset the ravages of inflation on America’s pocketbook:

1. Improve purchasing decisions.

With persistent inflation, delaying a purchase can be costly since the price is likely to rise in the future. For example, if you wait a year to buy the washer and dryer you need, they may increase 10% in price. You then may decide to make the purchase today to save money. The same can be said if you want to stock up on groceries when you see sales in the stores. Making better purchasing decisions can save households money and help maintain lifestyles despite increasing prices. A caution is that consumers may unwisely decide to dip into their emergency funds to make these purchases to save money.

2. Be a more intelligent shopper.

When I was a young adult the high inflation rates of the 1970s led to the birth of store brands or generic groceries. These were products that saved consumers money by forgoing specific branding or unneeded packaging. Today, one-way consumers can be better shoppers is by purchasing generic drugs and store brand foods. Looking for used merchandise versus new is another savings tip. During inflationary times you need to become a more intelligent shopper by looking for different ways to save money.

Another related action is to negotiate for better pricing on everyday purchases whenever you can. There is nothing wrong with asking for a better price — you get what you can negotiate.

3. Take advantage of low interest rates.

Work with clients to lock in the low interest rates while they still can. While The Fed will likely begin to raise interest rates in 2022, consumers should lock in low fixed interest rates on debts. If inflation increases substantially, rates are likely to go higher. Inflation theoretically makes paying fixed-rate debt easier, since you’re paying back the loan with cheaper dollars.

4. Invest in asset classes that are inflation hedges

Conventional wisdom is that stocks, real estate, floating rate notes, and US Treasury inflation-protected securities provide hedges against inflation. Despite the concerns people have about riskier asset classes, owning assets like these can be a very good way to combat inflation. For example, the case for owning stocks is that corporations will sell their goods at increasing prices, which will lead to higher revenues, earnings and inevitably, stock prices. Some of the best stocks to own during inflationary times would be companies that can increase their prices naturally during inflationary times. Companies that produce commodities like oil, natural gas and metals normally enjoy pricing power during periods of inflation.

5. Purchase an annuity to pay essential living expenses.

Another way to hedge against inflation for older adults is to take a portion of their investment portfolio and use it to purchase an annuity that covers their essential living expenses and then becoming more aggressive investing the remainder of their portfolio to offset inflation. By taking care of the essential expenses the individual has the freedom to take more investment risk.

6. Invest in work-related skills.

By far the best investment individuals can make to be prepared for an inflationary future is an investment in employable skills. For most individuals their ability to earn an income is their greatest asset — their future earning power. This investment begins with quality education and continues with keeping skills up-to-date and learning new skills that will match those that make them the most employable now and into the immediate future. Being able to stay on top of a business’s changing needs may not only help to inflation-proof salary, but also recession-proof people’s careers.

Inflation has been called the silent tax as it takes cash away from consumers each day without a new law being enacted. There are a number of actions that can be taken to offset the effects of inflation on lifestyle, investments and spending habits. As a financial professional you need to dust off your inflation fighting lessons of years ago and study the current economy to help consumers address today’s inflationary environment.

Harry N. Stout (credit: Stout)Harry N. Stout has been the president of Fidelity & Guaranty Life, deputy chief executive of Old Mutual Financial Network, and managing director of Insurance Insight Group. He is also the author of the new book Good Money Habits in 17 Minutes Per Day


© 2024 ALM Global, LLC, All Rights Reserved. Request academic re-use from All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.