Steep Inflation Hurting Retirement Plans: Cerulli

Significant increases in inflation are impacting investors’ retirement portfolio returns, but inflation hedging tactics can help mitigate that, according to a report from Cerulli Associates.

The Consumer Price Index rose 7% year-over-year in December 2021, its highest annual increase since 1982, the Cerulli report notes.

Inflationary periods make it more difficult to balance current and future consumption, and personalized advice can help participants make informed decisions about spending, saving and investing that take inflation into account, according to the report.

The report is based on a survey of 24 target-date fund managers with around $2.9 trillion in target-date fund assets surveyed in the second quarter of 2021 as well as a survey of 1,493 retirement investors — including active workers and retirees — conducted in the first quarter of 2021.

Some retirement plan providers may urge participants to save more during inflationary periods, according to the report. However, participants likely already would have deferred more money to their retirement plans if they were able to, the report notes. Therefore, retirement plan providers should present additional solutions — such as inflation hedging strategies — to participants, the report adds.

Those strategies include treasury inflation-protected securities and commodities, according to the report. Almost all, or 96%, of target-date fund managers said that they allocate to TIPS in at least one of their target-date series, while 32% said they do so for commodities, according to the report. Additionally, 13% said they allocate to natural resources, 9% said they allocate to infrastructure and 8% said they allocate to non-U.S. inflation-linked securities, according to the report.

Although an effective hedge against inflation, TIPS are relatively expensive and currently have negative real expected returns, according to the report.

“Target-date managers are often strategic, or even tactical, when it comes to incorporating inflation-hedging strategies,” Shawn O’Brien, associate director of retirement at Cerulli, said in a statement. “Specifically, many target-date managers like to employ higher allocations to inflation-hedging strategies during the later phases of the glidepath.”

Other asset classes that can be hedges against inflation include real estate investment trusts and direct real estate investments, according to the report. Seventy-seven percent of target-date managers allocate to traded REITs while 21% allocate to private or direct real estate, according to the report. Allocating to private real estate has become more common — in 2019, 13% of target-date managers made allocations to it.

Delaying Social Security claims can also hedge against inflation, the report says. Slightly more than half, or 51%, of retirees say that Social Security is their primary source of income in retirement, according to the report. Although retirees can begin claiming Social Security benefits at age 62, doing so reduces that person’s monthly benefits by 30% compared to those of a person who waits until full retirement age, the report notes. Full retirement age is dependent on date of birth and is usually between ages 66 and 67, the report adds.

There is also a cost-of-living adjustment to consider with Social Security — the Social Security Administration determines annually if a COLA is necessary based on any change in the Consumer Price Index for Urban Wage Earners and Clerical Workers, the report says. The Social Security Administration will put a COLA into effect if there is an increase in the index, the report says. For this reason, delaying Social Security claims can be a hedge against inflation, according to the report.

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