Your clients—and prospective clients—may not understand stocks, bonds or the financial markets, but they all have an inflation story. Anyone with recurring spending patterns likely can tell a story about how much more they’re paying today for a good or service they bought just a year ago, let alone five years ago.
In a 2021 year-end survey done with 2,000 U.S. adults, my firm eMoney Advisor found that the top-ranked concerns for U.S. adults approaching 2022 were gas prices, paying bills and inflation (eMoney Advisor, Financial Wellness Survey, n=2,000 U.S. adults, December 2021). And now in 2022, facing both choppy financial markets and rising inflation, you could say that their concerns are validated. Many are wondering, what if inflation does stay at elevated periods of time? How will that affect my weekly or monthly budget, and what is the impact to my long-term financial goals? Advisors are being challenged to assess the impacts to clients’ financial plans.
The variability in the macroeconomy today is palpable. In the U.S., there’s lingering evidence of a tight housing market, market uncertainty with a 10% correction at the start of year, and now news from the Federal Reserve (Fed) that it would soon raise interest rates for the first time in more than three years.
The overall impact of inflation and how it will coalesce with a number of economic challenges facing Americans today is a lot for investors to wrap their heads around. Inevitably, this has made planning short-term purchases and long-term planning for the average American much more difficult.
Planning For The Best; Preparing For The Worst
The “4% withdrawal” rule of thumb—popularized by Bill Bengen’s research—was rooted in a premise of beginning retirement income withdrawal rates of 4% and then increasing that amount annually by inflation. Well, what does that to your plan when inflation runs 2x, 3x, or 4x the normal rate? Do you “give yourself an income raise” in retirement? Cap increases by 3% if inflation runs higher than 3% And what happens in a “perfect storm “of a significant market decline and inflation pressure.
In times of uncertainty, reassurance and guidance are highly valued. If inflation increases well above the Fed’s 2% target, then you need a plan. Financial professionals that can deliver on that guidance with financial planning will be sought after for 2022 and beyond.
Financial planning or creating a financial plan isn’t a one-time, transactional exercise. As you build a plan, there are a number of inputs that help to create the personal and financial circumstances for each client. As those factors evolve, whether in one’s control or not, it’s the ongoing monitoring and assessment of those factors that provide future confidence in the plan.
In particular, financial professionals that use financial planning technology are in a particularly strong position to strengthen client relationships during uncertain times. With planning software, you can enter your assumptions and model those projected changes quickly—and visually. This not only provides transparency to the planning process where you and the client “co-plan,” you can also assess the potential impact to a plan in real time.
Presenting plans in highly visual and digestible formats can help distill the complexities of a plan into more impactful messages. Working with clients on “what-if” scenarios lets them see firsthand the impact of their financial decisions while giving them the flexibility to adapt their plan to their life circumstances. For example, with inflation, you can adjust the inflation amount from here forward, or provide for an increased inflation amount for a period of time—say, perhaps the next seven or eight years—and see if your plan could hold up to that type of event.
Monte Carlo simulations can provide clients with a single probability of success for their plan. This is particularly powerful in times of market volatility or other uncertainty when clients tend to seek out assurance that they’re on track to meet their personal and financial goals.