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One advisor says clients who express inflation concerns are primarily those who had mortgages and children in the 1970s and early 1980s, when inflation hit double digits.Christopher Katsarov/The Canadian Press

Rising inflation is forcing some advisors to have difficult conversations with clients about their spending habits and whether they should make adjustments to their financial plans.

The inflation and interest-rate landscapes are “shifting dramatically,” wrote BMO Capital Markets economists in a Nov. 19 report, adding they believe rising costs could be “more persistent than most initially thought” and interest rate hikes could come sooner and faster than forecast.

“For investors, it’s worth dusting off the old inflationary playbook and giving it a closer look,” the economists wrote.

In turn, many Canadians are paying closer attention to the latest inflation readings and reaching out to advisors for guidance and comfort that their portfolios can withstand a higher cost of living.

“It’s the most I’ve ever talked about inflation,” with clients, says Julia Chung, partner and senior financial planner with Spring Planning Inc. in Vancouver – especially after recent news that Canada’s annual inflation rate jumped to 4.7 per cent in October, the highest since February 2003.

“It’s a scary number, especially after years of it being relatively flat,” she says

Ms. Chung says the financial plans she has created for clients have traditionally been on the conservative side, with inflation projections of about 2.5 to 3.5 per cent. Still, clients are concerned about how rising costs and interest rates could eat into their savings and affect their lifestyles.

“It’s certainly difficult for some people,” Ms. Chung says, particularly those with more fixed income and cash flow. “That’s the reason people come to us – to look for some support.”

Her advice to clients is to review their budgets and see what adjustments may be needed. She also reminds people that some inflationary pressure could be temporary, such as on goods like cars and computers that are caught up in the current global supply chain crunch.

Rona Birenbaum, certified financial planner and founder of Toronto-based fee-only financial planning firm Caring for Clients, says advisors need to focus on the emotional as well as the financial impacts rising costs could have on their clients.

She says advisors should contact those who may be most vulnerable, including seniors on a fixed income and working people living close to break-even, first.

The age of the client could also have an impact on how they react to rising costs, Ms. Birenbaum adds.

“Clients who express inflation concerns are primarily those who had mortgages and children in the 1970s and early 1980s [when inflation hit double digits]. It was a very difficult time for them,” she says. “Just the word inflation has a different meaning to them.”

‘Temptation to take on more investment risk’

To those clients, if appropriate, she says making any necessary spending adjustments to maintain a strong fiscal position is important. “The key is to not overreact.”

The other concern she has for retirees, in particular, is the temptation to take on more investment risk to generate higher returns.

“It’s important to proceed with caution here,” she says. “It could work out, or it could be disastrous, particularly because rising interest rates often precede economic recessions,” which can lead to significant stock market declines.

Meanwhile, younger generations who haven’t lived through high inflationary times may not appreciate the negative implications, Ms. Birenbaum says.

“For them, it’s about education and encouraging them to focus on income growth to keep up with or grow faster than inflation,” she says.

Ms. Birenbaum also says clients should consider putting off purchasing items for which inflation is likely to be temporary, such as buying a new or used vehicle. Car and truck costs have surged amid a global microchip shortage and supply chain issues that may be worked out in the months ahead.

“You just don’t want to get caught up in a supply-demand squeeze,” she says.

It’s the same advice she offered earlier this year when people wanted to build decks on their homes as lumber prices were skyrocketing; they’ve since settled down.

On the other hand, costs like groceries and restaurant meals aren’t likely to drop materially, overall. Food pricing is stickier than discretionary product categories, she says. Housing is also expected to remain expensive, either buying or renting.

“Even if housing and grocery bills stabilized from here, they’re still elevated,” she says. “You have to plan for how you’re going to accommodate these changes in your in your cost of living.”

Review inflation assumptions

Jeff Ryall, an associate portfolio manager with Cardinal Capital Management Inc. in Winnipeg, says people getting close to retirement age may wish to reconsider when they take their Canada Pension Plan (CPP) and Old Age Security benefits as a way to tackle inflationary pressures.

For example, he points to numbers showing that Canadians would receive 36-per-cent less in CPP benefits if they took them immediately when eligible, at age 60, instead of waiting until age 65. Canadians can also choose to wait and receive 8.4 per cent more each year versus retiring at 65 – up to a maximum of 42 per cent more if they take CPP at age 70.

“It can help with your inflation-adjusted income and that longevity risk,” Mr. Ryall says.

He also says advisors should review with clients what inflation assumptions are being used in their financial plans. In meetings with prospective clients, Mr. Ryall has come across financial plans containing inappropriate inflation assumptions based on the industry’s suggested guideline of 2 per cent.

“You need to make sure that the assumptions used in the financial plan are in line or even more conservative,” he says.

Ms. Chung of Spring Planning says advisors should also help clients ensure they’re personalizing their financial goals regardless of rising prices. She says some people may be willing to pay extra for products and services that are important to them.

“People should really focus on their own goals and say: ‘How am I spending? What spending allows me to live my best life?’” she says.

“One of the best things that we can do with personal finance is get away from this idea that there are rules that people should follow, and lifestyles that people should lead, and get really a lot more focused on what’s actually gonna make you happy,” Ms. Chung says.