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July 7, 2022, 12:46 p.m. EDT

10 things to talk about with your financial adviser

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By Angie O'Leary

Given today’s challenging markets and unprecedented economic circumstances, a midyear review of your investments and wealth plan takes on a heightened sense of urgency this year. Stock prices are down, interest rates are up, the pandemic is still lurking and inflation hovers at a four-decade high. Add the looming retirement for many boomers, as well as the labor and housing shortage, and you have the perfect storm of uncertainty. Here are 10 strategies to consider discussing with your financial professional in this volatile market:

1. Make appropriate inflation adjustments

You likely have assumptions of a 2% to 3% inflation rate built into your long-term portfolio. As of midsummer, the 12-month change in the cost of living topped 8%. Even if it doesn’t stay that high, you may want your assumptions to reflect an elevated inflation rate going forward. This is especially important for retirees or shorter-term investments. Using what-if scenario planning to adjust various inflation rates can help you understand the implications on your long-term plan.  

Inflation is also impacting home and auto values as well. Make certain your insurance coverage remains sufficient to meet replacement costs.

2. Focus on your ‘real’ returns

Many asset classes generated solid, after-inflation (or “real”) returns in recent years. That all changed in the past year as inflation soared. Assess whether your portfolio is effectively positioned to continue to earn competitive, real returns over the long run.

3. Review your expenses

You may need to adjust your spending to reflect the fact that most things are more expensive than they were even a year ago. Setting money aside to invest toward your most important goals should remain a top priority. If your budget is strained due to higher living costs, consider adjusting your spending plan to keep your long-term financial goals on track. You may have to postpone discretionary spending or those big ticket items that you planned, such as your kitchen refresh or that marquee destination trip. 

4. Review your risk assumptions

This year continues to provide roller-coaster market performance and serves up a reality check for the risk assumptions built into your portfolio strategy. Are you comfortable with how much your portfolio has fluctuated and are you willing to remain patient and wait out a recovery? Or are you gnashing your teeth given the market’s seemingly persistent volatility? This is a good time for an honest assessment of your risk tolerance and to make any appropriate adjustments to your portfolio.

5. Review how rising interest rates may affect your debt

Any loans subject to variable interest rates will likely become more expensive. The recent interest rate hikes are putting more pressure on the overall cost of new housing. This can include an adjustable-rate mortgage on your home. Rates also vary on most college loans underwritten by private lenders. Make adjustments to your spending plan to account for these potential changes.

6. Consider rebalancing your portfolio

Regardless of market conditions, your asset allocation mix should remain in balance with your target allocation, based on your risk appetite and time horizon. This is true in both up and down markets. With interest rates increasing, you will likely find your bond portfolio has declined in value. As investments perform differently with market conditions and rates, the asset mix shifts away from your target allocation. This may require you to rebalance your overall portfolio, reduce positions that have grown beyond the initial levels you established, and add to positions that currently represent less than the original allocation percentage.

7. Protect your retirement income strategy

Market volatility takes a toll on those in or near retirement. If you must withdraw funds from your investments to meet current income needs (or plan to shortly), you need to be aware of “sequence of returns” risk. This is the risk of suffering a significant portfolio decline early in retirement while withdrawing funds from your investments. Your portfolio can rapidly decline in value when this occurs, putting your long-term retirement income strategy at risk.

A ready access line of credit may be a good option to hold you over until the market recovers. Also, consider adding to your portfolio sources of reliable income. This might include the addition of an annuity with a guaranteed income benefit. Ensuring you are positioned to have the income you need in down markets is a smart move.

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