Wealth and Income, What's the Difference?

Market downturns and rampant inflation may not have been front and center on your mind last year. But with the cost-of-living surging and market volatility threatening your retirement plans, it’s important to make sure you know your options when it comes to protecting your wealth and your income and the differences in doing both.

Keeping Up with Inflation           

Inflation is the erosion in purchasing power over time. In most years, it’s largely benign. In fact, a certain amount of it is hard-wired into the economy; the Federal Reserve currently maintains a 2% inflation target. But with income being the foundational underpinning to literally your ENTIRE financial success, higher-than-expected inflation figures can wreak havoc. Unfortunately, inflation isn’t something you can stop.

Some fixed income sources pay a cost-of-living adjustment (COLA), such as Social Security, to help with higher living costs. But many pension plans do not. The income you were planning on receiving in retirement may not stretch as far as you thought when inflation surges higher. But there are steps you can take to protect your income streams.

Shifting your balance sheet to investments specifically geared towards inflationary cycles may be able to help, such as I-Bonds or TIPS. Both are issued and backed by the US Treasury. I-Bonds pay a guaranteed base rate independent of inflation that could be as low as zero, and a second rate based entirely on changes in the Consumer Price Index for Urban Consumers excluding food and energy (CPI-U). TIPS meanwhile adjust in price, rather than income payout, with a principal value that rises and falls based on changes in inflation. They also pay interest, though that component does not change with inflation.

Floating rate bond funds, which adjust their income payouts based on rising/falling interest rates, may also help increase your income during an inflationary cycle. These securities are not generally backed by the US Treasury and can sometimes carry significant credit risk, so it’s important to speak with your financial advisor to fully understand the risks before investing.

However, income isn’t the only thing to be aware of when it comes to weathering inflation and market volatility.

Wealth Erodes from Inflation, Too

When the value of a dollar declines, all the stuff you have that’s denominated in dollars also declines. What may have been a $1M portfolio last year may now only go as far as $950,000, even though the value hasn’t dipped!

Protecting your wealth is a different challenge than protecting your income, and your asset allocation may need to change to adapt to a high-inflation environment. Hard assets such as gold and real estate have historically fared well during periods of high inflation, as have commodities. (Past performance is not a guarantee of future results and a discussion of asset classes is not a recommendation to purchase).

There are also investing styles that may come into favor during inflationary periods. Interest rates tend to be higher during these cycles to counteract the effects of inflation, and the knock-on effect of higher rates can lead to outperformance of certain strategies when compared to others. Some of this is commonly referred to now as factor-based investing.

The number of tweaks and alterations you can make are endless, but none of them are guaranteed to help you better reach your goals. Ask your advisor about what steps you can take to get your balance sheet and investment accounts closer to reaching your financial objectives!

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Carmichael Hill & Associates, Inc. is a U.S. Securities and Exchange Commission Registered Investment Advisory firm. Registration does not imply that the SEC has endorsed or approved the qualifications of Carmichael Hill or its respective representatives to provide any advisory services. Advisor does not render or offer to render personalized investment advice or financial planning advice through this medium. Advice can only be given after:

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