Here’s what you already know: The world is a pretty crazy place right now. From high inflation and rising interest rates to major market fluctuations, today’s financial uncertainty exceeds anything we’ve seen since the financial crisis of 2008 — and perhaps even before that.
But aside from the immediate impact on the cost of living, what does all this heavy economic weather mean for your retirement plans? And more importantly, how can you protect your precious nest egg from its worst effects?
Stress test your portfolio
A good place to start is by using financial planning software to figure out what a no or low growth period is for your retirement fund. Ideally, it should be somewhat more robust than free software on the Internet. Instead, you need enough “bells and whistles” to play around with different variables and really understand their potential effects. (A qualified financial advisor can help you identify the best software to use. I like E Money Advisor.)
These variables should be things like:
- What if we see inflation at 6% for a decade?
- What if I lose 20% of my portfolio value in the next three years?
- My annual rate of return in retirement is 5% and not 7%?
By stress-testing your portfolio against these scenarios, you can figure out whether you have a gap between your projected income and the level of income needed to finance your planned retirement lifestyle — and if so, how big that gap is. Knowing this will help you decide what steps to take to help close it later.
Maximize your savings options
This brings us to the second step: taking advantage of all possible savings vehicles. For example, while most people participate in a 401(k), fewer people are familiar with a cash balance plan. This is a type of tax-deferred defined benefit that allows you to invest a certain percentage of your income each year in addition to whatever you put into your 401(k).
Adding one to your portfolio is a great way to build your pension pot. In fact, if you’re in your early 50s, a cash balance plan with a 401(k) saving $67,500 a year plus profit sharing is the difference between saving $258,500 — all on a tax-deductible basis (it’s a cash balance plan layered on top of a 401(k) with profit sharing). . Accumulated over a decade or more, that can be a very healthy boost to your retirement fund!
Divide your nest egg
There are two types of expenses that will ultimately define your retirement lifestyle: fixed and variable. Fixed expenses include unavoidable expenses that you incur from year to year, with little or no control over when you pay them. Things like your mortgage, utilities, real estate taxes, your kids’ college fees.
Because these costs are not negotiable, you should set aside a certain portion of your retirement portfolio to cover them — which is where more predictable income investments like municipal and government bonds, structured notes and annuities come in. A fixed rate of return, or guaranteed return in the case of annuities, so they can be tied directly to your fixed outgoings. Resist the temptation to overcorrect by investing your entire fund in fixed income vehicles. Otherwise, you run the risk of reaching a point where inflation outpaces your expansion rate.
Meanwhile, variable expenses are lifestyle expenses that you have some control over, such as vacations, entertainment, and travel. These should be financed from a separate part of your portfolio to avoid eating up the money you need for your fixed expenses, usually by selling stocks or your retirement fund at the right time (hopefully!) without selling at a loss or incurring substantial fees.
Note that some expenses may appear in both expense buckets. For example, your medical premiums are a fixed expense, but any expenses you or a family member incurs due to illness or injury should be appropriately included as a variable expense.
Be prepared for anything
At any point in your career, it’s completely understandable to be concerned about how this type of financial uncertainty might affect your ability to live the lifestyle you want after you finish work. Yet the worst thing you can do is stick your head in the sand and hope for the best.
Of course, none of us can predict exactly how long this current storm will last or when the next one might hit. But by monitoring your rate of return and expected expenses, taking full advantage of any savings vehicles, and finding the right balance of fixed and variable income investments, you’ll give yourself the best chance of making it through with your capital and your retirement. As well as projects.
Director of Diversity and Inclusion, Executive VP, Equity Advisor
Equitable’s Executive VP Stephen Dunbar has built a thriving financial services practice where he empowers others to make informed decisions and take responsibility for their futures. He and his team advise over $3B in AUM and over $1.5B in defense coverage. As DEI’s National Director for Equitable, Stephen acts as a change agent for the organization, creating a culture of diversity and inclusion. He earned a master’s degree in finance from Rutgers and a JD from Stanford.