Whether in the headlines or at the till, your customers see, feel and hear inflation.
The natural reaction to rising prices is for customers to invest more aggressively for higher returns in order to keep up with the higher cost of living. However, this strategy can also result in greater losses that can wipe out purchasing power faster than any rise in CPI. Instead, suggest these steps to reduce your customers’ spend and increase revenue without reducing their lifestyle or increasing risk.
Get a perspective
According to the latest figures, the consumer price index for all urban consumers (the most cited index in the US) rose 6.2% in the 12 months before seasonal adjustment. If that number represented a customer’s typical spend of, say, $ 7,000 per month a year ago, it means their spend is now around $ 7,400 – an increase, certainly, but not big enough to cause serious pain. And the recent rise in prices can largely be attributed to likely temporary factors in the recovery from a global pandemic – increased demand meets supply constraints.
Retired customers in particular may be concerned about rising prices as they are not benefiting from the wage increases for those still in work. However, these retirees could take comfort in the fact that social security benefits (likely a large part of their retirement income) are designed to increase with inflation. From December 2021, the checks are to be increased by 5.9%. And while prices in general are likely to rise to some extent for the rest of the lives of retirees, their actual expenses may not rise by the same amount – and they could fall in both real and nominal terms.
As David Blanchett, head of retirement research for Morningstar’s Investment Management Group, found in his study Estimate the true cost of retirement:
“We find that there appears to be a ‘retirement spending smile’, with spending on retirees falling in real terms during retirement and then rising towards the end. Overall, however, the real change in annual expenditure due to retirement is clearly negative. «
Eliminate unnecessary expenses …
Customers may not be able to lower the prices of certain goods and services they buy, but it is a good time to see if there is some way to lower the overall customer spend.
You can start by analyzing your typical monthly spending to see what can be saved. Paper, pen, and calculator are the traditional tools, of course, but customers may be able to get automated billing through their bank, credit union, or credit card provider. You can also use apps and software programs like Mint, Goodbudget, or You Need a Budget.
… especially the big ones
The two biggest expenditures for many customers are often neglected: taxes and interest.
Make sure customers take all possible measures, year round, to lower their taxes, including maximizing pre-tax contributions to retirement plans, realizing capital losses, and taking capital gains when possible while customers are doing so stay in the 0% capital gains tax bracket. Once clients have received their 2021 tax returns, be sure to get a copy to see if there are any opportunities to lower their taxes in 2022 and beyond.
As for the interest cost, customers should first eliminate any expensive debt such as credit cards or student loans. If they have more home equity than cash available to pay off these «bad» debts, customers should consider obtaining a home equity loan, line of credit, or a new mortgage to lower the appropriate interest rate on the debt and extend the term extend; which significantly reduces the monthly payment.
While your clients may not want to take on additional volatility or risk in search of increased returns, there are ways to increase the returns on conservative investments, even in a “zero return” environment.
Start with longer-term CDs at the customer’s bank or credit union that, while still not paying much, often only have a small penalty of six to twelve months in interest if the CD owner withdraws the money before the due date (an especially tiny price payable when inflation and interest rates rise and better CDs can be found elsewhere).
Fixed income tax-privileged annuities aren’t quite as safe as CDs, but they usually offer a slightly higher rate of return and have a pre-set maximum early withdrawal penalty.
Series I savings bonds currently pay 7.12%, and that interest is exempt from state income tax. Customers can purchase up to $ 10,000 per person per calendar year at www.treasurydirect.gov.
Customers with significant equity in their home may want to raise a proverbial bazooka to fight inflation by borrowing against the value of the home – a new 30-year fixed-rate mortgage for up to 80% of its estimated value the house will provide dollars that can be spent or invested today. Then, when long-term inflation actually comes into play, the monthly mortgage payment will be worth less and less in “real” dollars, while at the same time the value of the home will theoretically increase (at least in terms of “nominal” dollars).
True, the interest rate on the mortgage will likely exceed what the customer can earn from investing the mortgage proceeds in a safe and liquid investment, at least for now. But if / when prices rise over an extended period of time, so should interest – even those paid on safe, liquid investments like CDs and government bonds. In fact, three years ago 5-year CD rates were over 3%, which is roughly what lenders currently charge for a 30-year fixed-rate mortgage.
Meanwhile, a customer only needs to make a relatively small payment per month to continue the strategy. And if for some reason inflation subsides, hopefully the customer can always use the retained proceeds from the original loan to pay off the mortgage.
Kevin McKinley is the Chief Executive / Owner of McKinley Money LLC, an independent registered investment advisor. He is also the author of Make your kid a millionaire (Simon & Schuster).