The four unknowns of retirement planning – Twin Cities
To a great extent, how you approach investing depends on how you deal with four financial unknowns: longevity, inflation, market returns and tax policy. In this article, we break down each of these unknowns, and offer suggestions for ways that may help insulate you from their risks.
No one knows for certain how long they’ll live, although we do know what can help you live longer. Genes play a big role, as does eating healthy, not smoking, exercising and managing stress. Even where you live — down to the ZIP code — may have an influence on your life expectancy.
In an unexpected development, after years of steady improvement, life expectancies in the U.S. are down in the post-COVID era. According to the Centers for Disease Control and Prevention, excess deaths due to COVID-19 and other causes in 2020 and 2021 led to an overall decline in life expectancy between 2019 and 2021 of 2.7 years — the sharpest two-year decline in more than 100 years. For men, life expectancy dropped 3.1 years, and for women, it dropped 2.3 years.
COVID wasn’t the only reason for declining longevity: There have been increases in mortality rates due to drug-related deaths, suicide, liver disease, traffic accidents, homicides and heart disease over the same period and among populations that generally experience greater inequality, according to research published by the University of North Carolina at Chapel Hill.
To support a retirement that could last for 20, 30 or 40 years, you need to create a financial plan that considers your life expectancy and supports that timeframe with a well-constructed, diversified investment portfolio. In our financial plans, we regularly project life expectancies to at least age 90.
Last year about this time we thought that prices could start coming down by mid-2022. Unfortunately, it has taken much longer to tamp it down. Although energy and food prices have moderated significantly over the past year, the natural rate of inflation is now at about 4.8%, reflecting a tight labor market.
On Feb. 1 (as expected), the Federal Reserve raised interest rates by ¼ of a percentage point to a current target range of 4.5% and 4.75%, to combat inflation. Having a well-diversified core allocation is a way to diversify over the long term because stocks and bonds do not necessarily go up and down at the same time. 2022 was different because inflation was going up so fast that both stocks and bonds were affected.
Still, we believe diversification to be a sound strategy for the long term. This may be time to broaden your investment toolkit to add exposure to asset classes that are not as sensitive to structural inflation or rising interest rates.
No one has ever been able to consistently predict what the stock market will do over the next 30 days, six months or a year. But while past performance cannot guarantee future results, history shows that over longer periods of time, say five, 10 or 20 years, stocks have consistently produced positive returns far above other asset classes
Trees don’t grow to the sky, and eventually, markets correct as part of a normal cycle. Since the start of the year the market has remained volatile. Creating a durable investment portfolio has to start with something you can control: Defining your goals and defining how much you’ll need to make them a reality.
You can’t control what the markets do, but you can control your reaction to bull and bear markets. If the Fed’s rate-raising unavoidably leads us into recession (and if this happens, we don’t think it would last very long), there are small steps you can take to lessen its impact: build up an emergency fund, pay off high-interest debt and develop alternative income streams.
Tax policy is one of the most complex and opaque cogs in the U.S. economic system. If you make decisions about your money based on the belief that tax policy remains static or predictable, eventually you may be caught off guard.
Taxes now are on sale. Now is the time to prepare for when the lower tax rates authorized under the Tax Cuts and Jobs Act of 2017 sunset in 2026. This year is an excellent time to begin to implement a good tax management plan that might include:
• Taking distributions from a tax-deferred account such as a 401(k) plan or Traditional IRA sooner than you need it, and pay ordinary income taxes at your lower current rate;
• Converting some or all of a Traditional IRA to a Roth IRA;
• Sidestepping new RMD rules that require beneficiaries to spend down inherited IRAs or 401(k)s within 10 years by taking distributions now and paying income taxes at lower current rates;
• Taking income from non-qualified accounts and paying capital gains at today’s lower rates;
• Taking advantage of higher annual and lifetime gift-tax exclusions before they sunset in 2026;
• Considering tax-advantaged charitable giving strategies.
Preparing for a successful retirement depends on a number of factors, some of which you can control, and some you can’t. What’s out of your direct control are the performance of the markets, interest rates, inflation and tax policy. In your control are your ability to earn an income, your assets and liabilities, your current savings, investments and living expenses, and your health. Putting your energy and focus into what you can control is age-old wisdom, and just as true in today’s uncertain world.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Note: This article was updated from the original that was published in February 2022.
Bruce Helmer and Peg Webb are financial advisers at Wealth Enhancement Group and co-hosts of “Your Money” on WCCO 830 AM on Sunday mornings. Email Bruce and Peg at [email protected] Securities offered through LPL Financial, member FINRA/SIPC. Advisory services offered through Wealth Enhancement Advisory Services, LLC, a registered investment advisor. Wealth Enhancement Group and Wealth Enhancement Advisory Services are separate entities from LPL Financial.