How Financial Advisors Can Help Clients Prepare for Future Inflation

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Inflation is infamous the world over for diminishing the value of money over time. It is also an inevitable outcome of time, and you are bound to encounter it at some point, no matter where you live or what you do. Inflation refers to the phenomenon of an increase in the prices of goods or services. This means that you would be able to buy fewer things with the same amount of money when inflation rises. For example, the famous Big Mac from the fast-food chain McDonald’s costs 40% more than it was ten years ago. 

The Consumer Price Index at the end of March 2022 increased by 8.5%. This was the highest 12-month advance reported in the U.S. since December 1981. Consumer prices for food increased by 8.8%. Between March 2021 and March 2022, consumer prices rose by 32% for energy alone, including 70.1% for fuel, 48% for gasoline, and 11.1% for electricity. The year 2021 saw the worst inflation surge, where the inflation rate increased to 6.8%, indicating a drastic fall in the purchasing power of the U.S. dollar. 

Inflation is vital for the economy as it helps it grow. Deflation or negative inflation can be detrimental to an economy. So, you do not necessarily have to fear inflation unless it goes beyond expected. In the U.S., inflation is calculated by the Bureau of Labor Statistics (BLS) by computing the Consumer Price Index (CPI). The BLS collects data on the spending habits of consumers on products like goods, fuel, mortgage, prescription drugs, education, etc. These habits can fluctuate based on the demand and supply of products and services.  

However, irrespective of whether there is an inflation surge or deflation, it is crucial to protect your assets from the changing values of money. Financial planning during inflation is critical, but it can also be challenging. This is why it can help to consult with a professional financial advisor who can take a look at your financial plan and decipher if it is strong enough to handle inflation. The advisor can also help you choose the best investments during hyperinflation, so your growth is not hampered. 

Let’s find out more about how to protect your money from inflation with a financial advisor’s help:

1. Avoid keeping cash:

Cash increases financial liquidity. It can come in handy when you are in a financial emergency. It also gives you a sense of achievement and confidence, knowing you have a certain amount of money you can rely on. However, cash can be your biggest enemy when it comes to inflation. The biggest problem with keeping cash is that you lose out on the possibility of earning interest. Money at the bank is as good as money in your wallet. While you can easily access it when in need, you will not see it grow with regular returns. 

Keeping cash can also interfere with your spending habits. A lot of people find it hard to control the urge to spend their money if it is readily available to them. When the inflation rate is high, spending more than you should further creates a deficit in your monthly budget. If you are someone who struggles with keeping a positive relationship with money, not keeping cash during an inflation surge can be helpful. 

During times of inflation, bank interest rates are the lowest. When compared to inflation, these interest rates may even offer negative growth. For instance, if the inflation is 6%, but the bank offers you a 3% interest, you end up losing money and not making any. The first thing that financial advisors do when inflation hits is to convert cash to assets and investments that can offer inflation-beating returns. 

2. Continue investing in stocks:

If you are wondering how to profit from inflation, you can consider investing in stocks. Your stock investments can offer you a buffer against inflation. Historically, stocks have provided good protection to investors against inflation. One of the reasons why they are the best investments during hyperinflation is that companies are not affected by high prices the same way as consumers. In most cases, companies maintain profits by shifting the burden of inflation onto the consumers. This helps them maintain stock prices as well as earn profits. Financial advisors often recommend keeping a good basket of stocks that offers enough diversification to outrun short-term market volatility and inflationary periods. 

If you have been investing in stocks, you can continue to do so without panic selling. In fact, irrespective of the rate of inflation, panic selling is hardly ever the right thing to do.

3. Invest in gold:

Gold is an all-rounder when it comes to financial planning. It can offer a great resale value. It can be a low-risk investment with the potential to earn high returns. Further, it provides a hedge against inflation. One of the reasons that makes gold one of the best investments during hyperinflation is that its value rises with inflation. Apart from being an asset, gold is also a common consumer commodity. When inflation increases, so does the value of this commodity. So, investing in gold can ensure that the value of your investment inflates with inflation. 

Financial advisors can suggest gold as an investment for several other reasons as well. Gold is a highly liquid asset that can be sold anytime and anywhere. It is universally accepted and has fixed standards of purity that make it seamless to buy and sell gold. Moreover, these days, investors also have the option to invest in gold digitally through funds and bonds. This helps you lower the cost of investment as you can make a relatively smaller investment in gold. Gold can be a good diversifier for your investment portfolio, too. If your portfolio is concentrated on equity, bonds, mutual funds, etc., you can consider adding gold for diversification. It can offer you a hedge against inflation while also serving as an asset for estate planning that can be passed down to your future generations in various forms like jewelry, bars, etc.  

4. Add more bonds:

Another great diversifier, bonds can offer low risk and stable returns. They also have another hidden attribute which is their ability to provide returns during inflation. Bonds like the Treasury Inflation-Protected Securities (TIPS) can offer safety from inflation as their principal value increases along with the inflation rate. As the name suggests, TIPs are U.S. Treasury bonds specially designed for inflation. The interest rates for these government bonds increase with the inflation rate and vice versa, offering investors a safety net against the rising prices. TIPs can have a maturity period of up to 30 years with a fixed interest rate. They are most commonly used by investors nearing retirement or in retirement as they can offer stability and low risk. TIPs provide interest in periods of six months, offering investors a steady flow of returns. Moreover, TIPs pay the inflation-adjusted capital amount at the time of maturity. So, they can be an excellent low-risk tool for financial planning during inflation.

5. Think about investing in cryptocurrencies: 

Cryptocurrencies are very new and have very little past data to rely on. However, they have offered exponential growth to some investors. The government does not regulate cryptocurrencies as in the case of fiat currencies like the dollar, pound, euro, etc. Cryptocurrencies are decentralized. This means that they are not affected by the basic demands and supplies of consumer goods and services. Given the limited number of cryptocurrencies and their perpetually high demand, you can expect their prices to rise and stay so for a while. Cryptocurrencies are modeled around scarcity to keep them in high demand. There is also a novelty attached to them right now. Non-fungible tokens, virtual houses, and more are further increasing their appeal. However, it is essential to understand that cryptocurrencies are very volatile and speculative. Their prices can move up and down and offer extreme profits and losses to investors. So, while they can provide security against inflation, they can pose many other risks. Firstly, it may not be ideal for beginners. Secondly, it can require a very high-risk appetite, which may not be present in retirees or those nearing retirement. The future prospects of cryptocurrencies are also unclear at the time. However, if you have adequate knowledge and can afford to add some risk to your portfolio, you can consider investing in them after careful evaluation. 

6. Evaluate your financial plan:

Financial advisors offer comprehensive assistance. This may not always be limited to a particular product that they may recommend for investment. They also look at your financial plan cumulatively and help you devise long-term strategies to protect your money. One of the things to know about how to protect your money from inflation is to be prepared for it. If you are planning for the future, inflation is bound to interfere with your returns. No matter how high or low the inflation rate is, your savings and investments will be affected by it to some degree. Keeping some cushion in your investment plan to counter inflation is critical. Most people account for 2 to 3% inflation when planning for their retirement. This underestimation can cost them their financial security in old age. When preparing for the long term, several aspects can change over time. Therefore, preparing for the worst can help you. It can benefit you to account for a higher rate of inflation and pick investments that can offer returns to beat it. This way, not only do you create wealth but also get to enjoy its proper value. 

A financial advisor aims to create a financial plan that includes a combination of investments, such as stocks that offer inflation-beating growth, bonds like TIPs that can provide growth in tandem with inflation, real estate that can offer security and astronomical growth, and others to create a well-diversified portfolio that can withstand most lulls and downturns. 

7. Be prepared to tackle inflation:

Insurance can be an excellent tool to secure your future and live a financially secured life irrespective of inflation. If you are concerned about life after retirement with rising inflation, you can buy a health insurance plan with adequate coverage to make sure you never run out of funds for healthcare. You can also consider tax-advantaged accounts like the Health Savings Account (HSA) that allows you to contribute your pre-tax dollars and enjoy tax-free growth. Long term care insurance can also be an essential precautionary measure to make sure you can afford the help you may need in the future. 

Another thing that can help is delaying your Social Security benefit withdrawals to increase your check. You can increase your Social Security paycheck by 8% for every year you do not make a withdrawal after your full retirement age. Additionally, you must plan your Required Minimum Distributions (RMDs) well. RMDs are mandatory withdrawals after the age of 72 from retirement accounts like the 401k. Failing to withdraw your money can result in a 10% penalty. While you deal with inflation, it is also essential to reduce your other unnecessary expenses, such as these penalties. Your financial advisor can help you create a withdrawal strategy that ensures minimal wastage in penalties and tax, so you are able to preserve your wealth.  

To summarize

Knowing how to protect your money from inflation is critical, especially given the current scenarios around the globe. The Covid-19 pandemic, as well as the Russia and Ukraine war, has burdened the world as a whole and created shortages of several essential items. These shortages have created unexpected inflationary trends that a lot of investors were simply not prepared for. However, it is never too late to turn things around. If you are struggling with inflation, reaching out to a financial advisor can help. Additionally, you can also focus on long term measures that can ensure optimal diversification and steady growth for your money irrespective of how the economy or market reacts. 

Use the free advisor match service to engage with a professional financial advisor, who can help you create an optimized investment strategy that can generate inflation-beating returns. Based on your requirements, the service matches you with 1-3 advisors suited to meet your financial needs and goals.

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The blog articles on this website are provided for general educational and informational purposes only, and no content included is intended to be used as financial or legal advice.
A professional financial advisor should be consulted prior to making any investment decisions. Each person's financial situation is unique, and your advisor would be able to provide you with the financial information and advice related to your financial situation.