How to keep your retirement on track in an unpredictable market

How to keep your retirement on track in an unpredictable market

Retirees and investors approaching retirement are under pressure this year. Inflation soared to multi-decade highs, stocks fell and bonds – a safe haven in normal times – crashed. The traditional portfolio of 60% stocks and 40% bonds had one of its worst years in a century.

No wonder retirement investors are so gloomy. Americans say they need $1.25 million to retire comfortably, a 20% jump from 2021, according to a recent Northwestern Mutual poll. A Fidelity report released in mid-November found that the average 401(k) balance fell 23% this year to $97,200. Unsurprisingly, a majority of wealthy investors now expect to work longer than they originally planned, according to a Natixis survey.

“Retirees are feeling the pressure,” says Dave Goodsell, executive director of the Natixis Center for Investor Insight. “Prices are rising and the cost of living is a real factor.”

Investors’ concerns about retirement are not unfounded, but all is not bleak. Rather than focusing on the past year’s losses, take a longer-term view and think about opportunities to earn and save more over the next 10 years. Whether you’re about to retire or have already passed your working days, exploring new tactics and engaging in thoughtful planning can help you take advantage of upcoming opportunities and perhaps turn lemons into lemonade.

“You don’t need a miracle,” Goodsell says. “You need a plan.”

Advice for early retirees

If you’re still in gainful employment, the next year will present solid opportunities to build your nest egg, thanks to updated contribution limits from the Internal Revenue Services. In 2023, investors will be able to contribute up to $22,500 to their 401(k), 403(b) and other retirement plans, an increase from $20,500, thanks to inflation adjustments.

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Employees age 50 and older can save an additional $7,500 over this limit. Americans can also contribute up to $6,500 to their Individual Retirement Accounts, up from $6,000 previously. The catch-up contribution for IRAs remains at $1,000. “You have to take advantage of it,” says Brian Rivotto, a Boston-based financial adviser at CapTrust, who recommends some clients maximize their contributions.

Stock returns are expected to be in the single digits over the next decade, but investors can also take advantage of the opportunity to buy stocks at prices well below where they were a year ago. And bonds are yielding more than they have in decades, creating the possibility of relatively safe returns in the 5% to 6% range. “It’s been the worst year for the 60%/40% [stock/bonds] portfolio,” says UBS Advisor Brad Bernstein. “But the next decade could be phenomenal because of the current bond yield situation,” he says.

When retirement is here and now

Of course, many people about to retire look at their year-end bank statements with trepidation because they intuitively understand something that academics have studied in depth: portfolio losses in the early years. retirement, when the nest egg is greatest and withdrawals begin, can dramatically shorten the life of a portfolio.

This phenomenon is known as sequence of returns risk, and a case study from the Schwab Center for Financial Research illustrates the magnitude of this risk. Research finds an investor who begins retirement with a $1 million portfolio and withdraws $50,000 each year, adjusted for inflation, will have a very different outcome if the portfolio drops by 15% at different stages of retirement. If the downturn occurs in the first two years, an investor will run out of money around year 18. If this happens in year 10 and 11, he will still have $400,000 left in savings in year 18.

To avoid the risk of having to dip into your retirement funds when the market has turned down, advisor Evelyn Zohlen recommends setting aside a year or more of pre-retirement income so you don’t have to dip into your accounts in the event of a decline. market at the start of retirement. “The best protection against the sequence of returns is to not be subject to it,” says Zohlen, president of Inspired Financial, a wealth management firm in Huntington Beach, Calif.

In addition to building up a cash cushion, investors can consider getting a home equity line of credit to deal with unexpected bills, says Matt Pullar, partner and senior vice president at Sequoia Financial Group in Cleveland. “Your house is probably never worth more than it’s worth now,” he says. “If you have a short-term expense, it may be better to take out that loan than to sell shares down 20%.”

There are also smart tax measures that investors can take when they retire. Zohlen says donor-advised funds are a convenient vehicle for wealthy charitable-minded investors, especially those who may receive a taxable portion of deferred compensation money, such as stock options. , just as they retire. “The perfect example is someone who regularly donates to their church and knows they will continue to do so,” Zohlen says. “So the year she retires, she gets a bucket of money that she’ll be taxed on. Well, put it in that fund. You’ll get a big tax deduction the year you get it. you really need and you can keep giving to charity for years to come. [from the donor-advised fund].”

Invest in retirement

Rising interest rates are a potential silver lining for investors who can now derive significant income from their cash savings, thanks to better rates on certificates of deposit and money market accounts.

Bernstein says he uses bonds to generate income for his retired clients, a task now made easier by higher rates. “We generate cash flow from fixed income, ideally, for clients to live on,” he says.

Captrust’s Rivotto says retirees should consider removing from the fixed-income portion of their portfolio to give stocks time to rebound. Even retirees need stocks to provide the long-term growth in their portfolio needed to support a retirement that could last 30 years or more. “I tend to be more 70/30 [stocks and bonds]and that’s because of longevity,” says Rivotto, who is based in Boston.

Roth conversions are for any stage

Although the markets have taken a beating this year, there are upsides for retired investors. For starters, now may be a great time to convert a traditional IRA (which is funded before tax but has withdrawals taxed as income during retirement) to a Roth IRA (which is funded with after-tax dollars but has non-taxable withdrawals). Roth conversions are taxable in the year you make them, but the potential tax burden will be less for 2022, as the stock price has fallen. There’s also an added benefit to doing it now, before the Trump-era tax cuts expire in 2025 and personal income tax rates return to pre-Trump levels. .

Of course, an investor must have cash to pay the taxes associated with a Roth conversion. Sequoia’s Pullar suggests that clients make a Roth conversion at the same time they create a donor-advised fund, which “can ease that pain via the tax deduction.”

Another option is to perform a partial conversion. The immediate tax burden will be less, and the Roth account may prevent you from moving into a higher tax bracket in retirement, since withdrawals will be exempt from income tax, says Zohlen.

A conversion may also be a smart move for investors who plan to leave a Roth IRA as a legacy to their children or grandchildren, especially if they’re in a higher tax bracket, advisers say. Under current rules, heirs have a decade to withdraw assets from an inherited Roth account. UBS’s Bernstein says he’s made a bunch of conversions this year for his clients. “Leaving your kids with a Roth IRA that they can develop over a 10-year period is awesome,” he says.

spend it

Falling expectations for equity returns over the next decade, combined with longevity risk, is one reason some advisors are taking a more conservative approach to retirement withdrawal rates. What’s called the 4% rule, which refers to the idea that you can spend 4% in the first year of retirement and then adjust that amount for inflation in subsequent years without running out of money, was the gold standard that financial advisors used when planning for clients.

“Over the past few years, we’ve kind of moved towards 3% to 3.5% as a safer exit strategy,” says Merrill Lynch adviser Mark Brookfield. “We felt that stocks would need to perform much better over time than expected for a 4% drawdown rate to be effective.”

Whatever withdrawal strategy you choose, set and stick to a budget, says Zohlen. This can have a big impact on the success or failure of a retirement strategy. “What makes the 4% rule work is letting the money in the account work,” she says. “For me, it’s not, ‘Does the 4% rule work?’ It’s, ‘Does the customer’s behavior allow us to rely on that?’ ”

Finally, don’t get carried away by the ups and downs of the market, says Sequoia’s Pullar. Perspective, he says, is an underrated part of retirement planning.

“This is the third time I’ve been through this kind of market volatility,” he says. He recalls proposing to his wife just as the financial crisis of 2008-09 hit. “I thought, ‘Oh my God, what am I going to do?’ What I didn’t realize was that the next two years created great opportunity.Retirement investors today are likely to look back 10 years and come to a similar conclusion. As Pullar notes, “Right now it’s hard to see.”

Write to Andrew Welsch at

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