Inflation has hit nosebleed levels. The S&P 500 is sinking fast. There's war in Europe. So how can people ace retirement planning in the face of such hurdles?
Should they invest more aggressively? More cautiously? Go back to work? Work longer? Move to a less expensive area?
There's no shortage of worries about how to finance retirement. And that's especially true now. The April monthly IBD/TIPP poll homed in on that challenge. Forty percent of adults said health care costs were a top concern. Saving enough money and the impact of economic uncertainties followed in importance. For older respondents, inflation and taxes also ranked among their top worries. The youngest respondents, age 18-24, fret about both taxes and housing costs.
So, what is the best way to plan for the future — be it five years from now or 30 — when the world is making retirement planning tougher?
"The short answer is, 'You can't. You can't plan with certainty,'" said Ric Edelman, a well-known personal finance author, radio host and financial advisor.
Retirement Planning Amid Uncertainty
But that doesn't mean retirement planning now is impossible. It's just that you must reset some of your expectations given just how fast key factors changed practically overnight. Edelman added, "It's unrealistic to think you can build a strategy right now for the next 30 years. Instead, build a strategy just to get you through this period of uncertainty."
The reasons why are painfully clear. Inflation soared at an 8.5% rate in March. That was the steepest increase in the cost of living since 1981.
In April alone, the S&P 500 plummeted 8.8%. That was its worst April since 1970, according to Dow Jones Market Data. So your 401(k) account and IRA almost certainly have shrunk so far this year.
And so have some of your dreams about retirement.
Time To Play Defense In Retirement Planning
What this means for your retirement planning is that it's time to play defense, not offense. Mainly, don't make big-ticket purchases or dramatic financial moves unless they are vital.
Bad moves now would leave you with fewer dollars whose value can soar in the next rally, says Judith Ward, financial advisor and a vice president of giant mutual fund complex T. Rowe Price.
And leave your money in existing diversified funds. That way you can prosper from the first wave of the next rally, which is usually an unexpected jump up. As for individual stocks, have cash ready so you can plow back in when there is finally a confirmed rally. "Remind yourself that the market has always come back," Edelman said.
Sure enough, the market has bounced back from world wars, the Great Depression, the Great Recession, the dot-com bust and other setbacks.
"Don't make expensive moves that you can delay for a few months or a year or even two," Edelman said.
For now, good retirement planning means getting through the market malaise in the best shape possible to take advantage of the next bull market.
Here are steps for achieving that.
Retirement Planning Do's And Don'ts
Remain in the market. "Continue to invest," Ward said. Especially with mutual funds, resist the temptation to go to cash. Why?
Individual mutual fund shareholders rarely, if ever, get out of the market near its top amid market volatility. And they rarely, if ever, get back into the market at its bottom.
In the 10 years ended Dec. 31, 2015, the broad stock market in the form of the S&P 500 rose 7.31% on average each year. But by flitting into and out of the market in reaction to market ups and downs, the typical shareholder in U.S. stock mutual funds gained just 4.23% each year on average, according to research firm Dalbar.
One more benefit to leaving your stock mutual funds in place: the price of shares has fallen. So for the same number of dollars you're already kicking in to your retirement accounts, you get more shares. "That helps your accounts take off once the market finally rebounds," Ward said.
Staying the course applies to the long-term portion of your savings portfolio, not to the portion you use to pay normal current expenses if you're retired or have large looming expenses.
With your individual stocks, you buy, hold, add or sell based on the rules of a time-tested strategy that tells you when to get in and out of securities.
Asset Allocation Tips
All of this advice applies regardless of your age. That's especially true concerning your asset allocation. That's what resisting the temptation to go to cash means. Stick with your investment plan. Don't mess with your asset mix.
And what should your asset mix be? Investors in their 20s and 30s should have 90% to 100% of their money at work in stocks and stock funds, says T. Rowe Price. In your forties, make that 80% to 100%. In your fifties, 65% to 85%. Sixties: 45% to 65%. Seventies and older: 30% to 50%.
That's generic advice for a person who expects to retire at 65 and live another 30 years. If you have higher risk tolerance, or hold high levels of cash, pump up your equities weighting accordingly.
Should You Continue To Work?
Stay on the job. Amid your retirement planning, let's say you're trying to decide whether to work. Even if you're itching to retire and relocate to a warmer climate, you can have it both ways.
You can relocate to the Sunbelt. And you can keep earning a paycheck and benefits. "In the past few years, people have learned that they can work remotely and still be productive," Ward said. Technology makes that possible. And employers are increasingly supportive of remote work, Ward says.
Better yet, your move can be temporary. If your company allows to you work remotely, it almost certainly won't care if your remote work alternates between your regular home and a temporary sunshine location.
Think of it as practice. "It's a good way to test whether you like that location enough to permanently relocate there once you really do retire," Ward said.
Your Financial Checklist
Work part time? What if you're weighing a third option: working part-time? "Run the numbers," Ward said.
That means asking five key retirement planning questions. First, would your pay be enough? Second, would a switch to part-time reduce your stress and leave you more energetic? Third, could you afford to go without benefits such as health insurance, retirement savings and a company match if it came to that? Fourth, would you receive other benefits such as sick pay, vacation and education or training stipends? Fifth, how much would you value the intangible rewards such as fulfillment and sense of accomplishment?
Weigh your tax consequences. What if your retirement planning has you leaning toward a part-time job? Weigh the negative tax consequences.
- You'll likely have to pay your own taxes, perhaps in a higher bracket.
- You may be responsible for 100% of your Social Security and Medicare taxes, not just 50% like a full-time employee.
- Numerous tax credits and deductions depend on your adjusted gross income (AGI). These credits phase out, or decline, as you earn more, until they finally become unavailable entirely. Make sure your part-time pay, combined with other sources of income, would not cost you a credit or deduction you're counting on.
There are also potential benefits. You may be eligible for a health insurance deduction and the earned income tax credit.
Impact On Social Security Benefits
Help your Social Security benefits? Suppose you are mulling a job change. To or from part- or full-time work, it doesn't matter. You may have valuable skills. Your pay might be high. That could help your retirement planning by boosting your Social Security benefits.
How? Because your benefits are based on your 35 highest paid years of work, Ward says. Your annual pay in your golden years might be much higher than it was in, say, your first few years of work. To see the impact on benefits, check out this calculator.
Hurt your Social Security benefits? Still, if you are younger than your so-called full retirement age (FRA), part of your Social Security payments may be temporarily withheld if you earn too much. Beyond FRA, that penalty disappears.
If you are younger than your full retirement age, the Social Security Administration deducts a dollar in benefits for each $2 you earn above the earnings limit. In 2022, that limit is $19,560. If you wait not only until your full retirement age but to age 70, your monthly benefit is boosted. Beyond that, you can't make your monthly payment from Uncle Sam any bigger just by delaying the start of Social Security.
So, yes. The turbulent stock market and economic headwinds makes retirement planning more difficult. But by making smart tweaks, you can make sure you sail through in one piece.
Follow Paul Katzeff on Twitter at @IBD_PKatzeff for tips about retirement planning and actively run portfolios that consistently outperform and rank among the best mutual funds.
