Inflation, an issue which the Federal Reserve initially discussed as a transitory event driven by pandemic-related supply chain bottlenecks and staffing shortages, may persist longer than expected due to the economic sanctions being placed on Russian oil exports. Oil is a critical input to the global economy, and the recent surge in prices will lead to higher producer and consumer prices in months to come.

Inflation and Retirement

Inflation is one of the largest risks facing retirees, who must balance the need to increase portfolio withdrawals to maintain their standard of living, while being mindful of the need to grow their portfolio for future spending needs. Inflation acts as a double-edged sword, as it pushes up the need for current spending, and can pose difficulties for generating the returns necessary to grow the portfolio. Consider the time period from 1964 to 1980, for example, when inflation rose from 1% to nearly 15%.1  During this time period, not only did retirees need to increase their monthly spending to maintain their standard of living, but the U.S. stock market delivered a real annualized return of -0.4%.2 This combination, increased spending needs and poor inflation-adjusted returns, makes for a very difficult retirement landscape.

Managing Inflation Risk

At CCM, we are an integrated wealth management firm, which means we design our investment strategies with your goals in mind. We intentionally construct portfolios with an understanding of the key risks to the accomplishment of your financial goals. As this relates to inflation risk, what we know is that not all companies and stocks are impacted by inflation in an equal manner. Companies most negatively impacted by rising inflation are those with heavy debt burdens, companies that are unprofitable and stocks which sell for high valuations. During that same 15-year period ending in 1980, value stocks delivered returns which were 5.1% above inflation,3 allowing retirees to safely increase their required portfolio withdrawals without jeopardizing their portfolio principal.

The future is uncertain, and we have no crystal ball to predict whether inflation will gradually subside or persist for another 15 years like we’ve seen before. However, as we saw in the 60s and 70s, value stocks have been performing very well as inflation has risen over the past 18 months, and we believe our portfolios are well positioned to mitigate this risk if it continues.

  1. St. Louis Federal Reserve
  2. DFA Returns Program
  3. Ken French, Dartmouth Data Library

NOTE: The information provided in this article is intended for clients of Carlson Capital Management. We recommend that individuals consult with a professional adviser familiar with their particular situation for advice concerning specific investment, accounting, tax, and legal matters before taking any action.