One solution? “We have a fundamental belief in the power of rebalancing portfolios. During this process, we determine whether we will hold excess cash per the clients' unique situation, risk tolerance and time horizon,” Folkes said.
“Every client's situation is different. And unfortunately, so many people have a hard time getting their heads around the effects of inflation on their long-term retirement plans, which can erode their purchasing power. As a result, we are constantly having inflation conversations with clients,” she added.
Randy Bruns, founder of Model Wealth, based in Naperville, Ill., said he and his partner worry most about inflation “for retirees whose lifestyles are largely funded by investments,” he said.
Bruns said they design portfolios for inflation protection using a healthy dose of both stocks and bonds. “Inflation expectations are automatically built into the current market prices. But sudden, unexpected inflation can disrupt the prices of both stocks and bonds. For this reason, we recommend short-term inflation-protected bonds (TIPS) as a partial component of the bond portfolios for retirees. This exposure provides an asset class that can be expected to perform relatively well in such an environment," he said.
Model Wealth uses the Vanguard Short-Term Inflation Protected Index (VTIP), “which gives us pure inflation protection without long-term interest rate risk. We typically use it for 20% of clients’ bond portfolios, depending on their income needs. I like to know there is two to three years deep in each bond portfolio,” Bruns said.