Every time you go to the gas pump or grocery store, you can see inflation creeping up. It can be overwhelming and stressful to now pay almost twice as much as you did for gas about a year ago, let alone all the other products that have significantly gone up in price. Your paycheck doesn’t go as far as it used to, and middle-income earners and the youngest demographic are the ones hit hardest by inflation today because their consumption patterns and items that they tend to buy have raised the most in cost.1
High inflation has been on everyone’s mind and has many people wondering what they can do to take action. We want to explore ways to address high inflation and set financial expectations appropriately. Today, we will go over some key issues to consider when dealing with periods of high inflation. We even have a checklist you can download that summarizes it all at the end!
Cash Flow Issues
When looking at the prices on items makes you wince, you might ask yourself, “What can and can’t you live without?” How have your personal expenses changed relative to inflation? You may even need to update your emergency fund.
Are there any additional ways to save money on your necessary expenses? For example, this might be choosing to make annual payments instead of monthly, buying staple goods in bulk, or consider saving money on gas by using a fuel saver like Costco or Hy-Vee or even an app like GetUpside, that saves you money. Consider reducing or delaying unnecessary expenses to relieve stress in other areas.
If you are working, are you worried about your earnings being able to keep up with this high level of inflation? If you are, consider ways you can increase your income. Ask for a raise, change jobs, develop new skills, pursue additional credentials, pick up a side hustle for a little extra cash.
If you are retired, are you concerned about your retirement income keeping up with inflation? Remember, Social Security has built-in cost of living adjustments that can help offset inflation. If you haven’t started Social Security, consider delaying benefits to increase your overall income and the level subject to COLA.
Does an annuity make sense for you? Make sure to talk to your financial advisor to see if this this product would be a good fit for you at this time. Be aware of the effect of portfolio withdrawals for income during times of high inflation and especially if asset values have decreased. If possible, try to reduce withdrawals by exploring options for liquidity or additional income, such as HELOCs, cash value of life insurance, etc.
Remember, these suggestions are not going to fit everyone’s situation. Make sure to talk to a trusted financial professional to see if any of these might be a good fit for you and your family.
Asset & Debt Issues
Because of high inflation, you might want to consider reviewing your asset allocations. You may be experiencing increased levels of interest-rate risk associated with a high fixed-income allocation. Because of this, think about maintaining or increasing your exposure to equities and other asset classes that are better positioned to keep up with inflation.
If interest rates rise, longer bond durations will be subject to higher volatility. To lessen the risk you face, you can consider allocating more toward shorter bond durations. However, remember there is a difference in yield between short and long-duration bonds because long-duration bonds are more vulnerable to interest rate risk.
Another question to ask yourself is, “Are you concerned about your fixed-income portfolio’s ability to manage the effects of high inflation?” If you are, consider these:
- Purchasing Series I Savings Bonds and/or Treasury Inflation-Protected Securities (TIPS) to hedge your portfolio.
- Purchasing CDs and/or Multi-Year Guaranteed Annuities (MYGAs) as a zero-volatility bond alternative. However, there is limited flexibility for penalty-free withdrawals that many MYGAs offer, as well as penalties for early withdrawal of CDs.
- Adding a fixed-income asset strategy can help lessen interest-rate risk and reinvestment risk. However, they come with limitations.
Another issue to consider during times of high inflation is your debts. If you have variable-interest-rate debts, understand how the rate is calculated to what extent inflation may cause your interest rate to increase. If it makes sense, pay down these debts or refinance them to fixed rates.
Have your taxable accounts been experiencing increased levels of volatility due to high inflation? If they have, consider ways to rebalance your portfolio to reduce your tax cost. This can include harvesting short-term losses, selling securities at reduced capital gains, and more. However, it’s critical to be mindful of wash sale rules, as well as the limit on the $3,000 ordinary income offset on capital losses.
Another thing to consider is what your current and anticipated income tax brackets are because of this high inflation. Is it a good time for you to review any potential Roth conversion opportunities? Consider this strategy if periods of high inflation could present opportunities for you to convert some assets to Roth accounts at lower share prices.
Keep in mind that inflation can be seen across several categories, not just gas or groceries. If you are looking for ways to mitigate the impact of inflation on you and your family, talk to a trusted financial professional. And remember, everyone is experiencing this, but it does affect people differently depending on their situation and income level.
If you’re looking for help or want some more information, download our checklist – What issues should I consider when dealing with high inflation? Or make a complimentary appointment with us here.
- What Issues Should I Consider When Dealing with High Inflation?