Retirement Planning In Today’s Market

The Do’s and Don’ts

Inflation is hitting 40 year highs. The S&P 500 is sinking. Russia has invaded Ukraine.

How do you keep focused on retirement planning during these challenging times?
– Should you invest more or less aggressively?
– Should you work longer?

There’s no shortage of worries regarding how to finance your retirement.

The majority of individuals coming close to retiring are worried about (1) rising health care costs. Further, they are concerned that they may not have (2) saved enough money, given the pressure of inflation on retiring to fixed incomes. And other may be concerned about (3) taxes and estate planning.

You can’t plan with certainty

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.

Your 401(k) account and IRA almost certainly have shrunk so far this year.

Markets will always be uncertain. The macroenvironment when you retire is unknown, be it five years from now or thirty years from now.

What you can do, however, is build a strategy to get your through this period of uncertainty.

The Investor Weekly Strategy

• It’s time to play defense and not offense. Now is not the time to make big-ticket purchases.
  
  
• Don’t be tempted to make dramatic financial moves.
  
  You will end up with fewer dollars available when the next rally returns. You want to leave your money in diversified funds. As per individual stocks, have cash ready so that you can put it to work when there is a confirmed rally.
  
  90% of my retirement funds are in large, diversified index funds and bond funds.
  
  10% of my investments are in individual securities. You can track my investments by viewing our Buy List.
  
  
• Remain in the Market.
  
  Especially with mutual funds. I want you to resist the temptation to go to cash. 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.
  
  You have already heard this, but it is worth reiterating. 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 moving 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.
  
  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.
  
  Note that “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.
  
  
• Assets Allocation
  
  All of this advice information applies regardless of your age. And it’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. 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 stop working? What about part time opportunities?
  
  If you can retire. Retire. But if the cash flow is questionable and you took a beating in the market, stay on the job. You can always relocate and keep earning a paycheck. Nowadays, companies recognize that you can work remotely and still be productive. You need to take full advantage of this if your job allows you to do so.
  
  Additionally, this is a great way to test whether you like the location enough to permanently retire there one day. I plan to do this when I retire with my wife to Asheville.
  
  I love working. I really do. I can’t imagine not working? But, one day, I’d like to only work two or three days a week. So what about working on a part time basis? That means asking five key retirement planning questions. First, would your compensation be enough? Second, would a switch to part-time reduce your stress? Third, could you afford to go without benefits such as health insurance, retirement savings and a company match? Fourth, would you receive other benefits such as sick pay and vacation ? Fifth, how much would you value the intangible rewards such as fulfillment with more free time to pursue hobbies, passions and interests?
  
  Two things that you will need to consider, depending upon your personal situation include (1) weighing your tax consequences and the potential impact to (2) social security benefits.
  
  You’ll likely have to pay your own taxes and perhaps this puts you in a higher bracket. You may be responsible for 100% of your SS and Medicare taxes, not just 1/2 like a full-time employee. Numerous tax credits and deductions depend on your adjusted gross income. These credits phase out as you earn more, until they finally become unavailable. Make sure your part-time income, combined with other sources of income, would not cost you a credit or deduction.
  
  There are also potential benefits. You may be eligible for a health insurance deduction and the earned income tax credit.
  
  SS Benefits are based on your 35 highest paid years of work. Yep. 35 years. Therefore, if you are younger than your full retirement age, part of your SS payments may be temporarily withheld if you earn too much. If you are younger than your full retirement age, the SS 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 age 70, your monthly benefit is boosted. Beyond that, you can’t make your monthly payment any bigger just by delaying the start of Social Security.