INFLATION PROTECTION FOR DC INVESTORS IS STILL MERITED
Jul 16, 2024
While inflation has subsided from its peak, it remains elevated, making incorporating real assets in portfolios a continued priority for retirement investors.
INFLATION COOLING BUT REMAINS ELEVATED
While inflation may have subsided from its COVID levels, it remains elevated and is still a key concern of many Americans today. Although some feel U.S. investors are “out of the woods”, it may be prudent to consider a “not so fast” rebuttal. It’s important to stay diligent and include allocations to inflation-fighting asset classes such as TIPS, commodities, and real estate in portfolios to help investors protect their retirement nest eggs.
Prior to April of 2021, inflation in the U.S. had not breached the 4% level in more than nine years; however, it skyrocketed to more than 9% in mid-2022 during the COVID pandemic. While inflation has been on the decline in response to aggressive U.S. Federal Reserve interest rate policy hikes, it still remains elevated. For example, at 3%, inflation (CPI-U) is still well above the Federal Reserve’s stated target of 2%. Core CPI, which removes the impact of food and energy due to their high price volatility, hovered at around 2% before the pandemic, rose to about 6.5% at its peak, and today remains above 3%.
Incorporating real assets in portfolios should continue to be a priority for investors today, especially retirees, given the significant potential impact of inflation on retirement outcomes. For example, a 65-year-old at retirement with a $250,000 portfolio (40% equity and 60% fixed income) and an annual withdrawal rate of 4%, an increase in annual inflation during retirement from 2% to 3% would result in five years less of retirement income. If inflation were to be 4%, the number of years of income is reduced drastically by nine years.
THE IMPACT OF INFLATION
Despite the optimistic view that inflation is back under control, the reality is it may take well into 2025 or longer for U.S. inflation to land back near its targeted level of 2%. This reinforces the importance and the value of incorporating asset classes that may help investors protect years of income during retirement.
Jeremy Stempien
Portfolio Manager
PGIM DC Solutions
The views expressed herein are those of investment professionals at PGIM DC Solutions at the time the comments were made and may not be reflective of their current opinions and are subject to change without notice. This commentary is not intended as an offer or solicitation with respect to the purchase or sale of any security or other financial instrument or any investment management services. This commentary does not constitute investment advice and should not be used as the basis for any investment decision. This commentary does not purport to provide any legal, tax, or accounting advice. PGIM Investments LLC is a registered investment advisor with the U.S. Securities and Exchange Commission. PGIM Custom Harvest does not provide tax, legal, or accounting advice. This material is for information purposes only, and is not intended to provide, and should not be relied on for tax, legal, or accounting advice. You should consult your own tax, legal, and accounting advisors before engaging in any transaction.
Certain information in this commentary has been obtained from sources believed to be reliable as of the date presented; however, we cannot guarantee the accuracy of such information, assure its completeness, or warrant such information will not be changed. The information contained herein is current as of the date of issuance (or such earlier date as referenced herein) and is subject to change without notice. The manager has no obligation to update any or all such information, nor do we make any express or implied warranties or representations as to the completeness or accuracy. Any projections or forecasts presented herein are subject to change without notice. Actual data will vary and may not be reflected here. Projections and forecasts are subject to high levels of uncertainty. Accordingly, any projections or forecasts should be viewed as merely representative of a broad range of possible outcomes. Projections or forecasts are estimated, based on assumptions, subject to significant revision, and may change materially as economic and market conditions change.
This material is being provided for informational or educational purposes only and does not take into account the investment objectives or financial situation of any client or prospective clients. The information is not intended as investment advice and is not a recommendation. Clients seeking information regarding their particular investment needs should contact their financial professional.
Investment products are distributed by Prudential Investment Management Services LLC, member FINRA and SIPC. PGIM Investments is a registered investment advisor and investment manager to all PGIM U.S. open-end investment companies. PGIM Quantitative Solutions, Jennison Associates, and PGIM are registered investment advisors and Prudential Financial companies. PGIM Quantitative Solutions is the primary business name of PGIM Quantitative Solutions LLC, a wholly owned subsidiary of PGIM. PGIM Fixed Income and PGIM Real Estate are units of PGIM.
© 2024 Prudential Financial, Inc. and its related entities. PGIM Custom Harvest, Jennison Associates, Jennison, PGIM Real Estate, PGIM and the PGIM logo are service marks of Prudential Financial, Inc. and its related entities, registered in many jurisdictions worldwide.
For compliance use only 1081565-00001-00