How to maintain your pension in an unpredictable market


Retirees and investors about to retire are under pressure this year. Inflation has reached its highest levels in decades, stocks have plummeted and bonds – a haven in normal times – have plummeted. The traditional portfolio of 60% stocks, 40% bonds has had one of its worst years in a century.

No wonder pension investors are so depressed. According to a recent Northwestern Mutual survey, Americans say they need $1.25 million to retire comfortably, a 20% increase from 2021. A mid-November Fidelity report found that the average 401 (k ) balance fell 23% this year to $97,200. Not surprisingly, most high net worth investors now expect to work longer than originally planned, according to a survey by Natixis.

“Retirees are feeling the pressure,” said Dave Goodsell, executive director of the Netixis Center for Investor Insight. “Prices are going up and the cost of living is a real factor.”

Investors’ retirement concerns are not unfounded, but it’s not all doom and gloom. Instead of focusing on last year’s losses, take a long-term view and think about opportunities to save more in the next 10 years. Whether you’re about to retire or your workday is already over, finding new strategies and committing to good planning can help you take advantage of the opportunities that lie ahead and maybe throw in some lemonade. Hey.

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

advice for ex-retirees

If you’re still in a paying job, thanks to the Internal Revenue Services’ updated contribution limits, next year offers solid opportunities to build your nest egg. By 2023, investors can contribute up to $22,500 to their 401(k), 403(b) and other retirement plans, up from $20,500 thanks to an inflation adjustment.

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Employees age 50 and older can save an additional $7,500 above that limit. Americans can also contribute up to $6,500 to their individual retirement accounts, up from $6,000. The catch-up contribution for IRAs remains $1,000. “You have to take advantage of it,” says Brian Rivotto, a Boston-based financial advisor at CapTrust, who recommends that some clients max out their contributions.

Stock market returns are expected to remain in the single digits for the next decade, but investors can take advantage of the opportunity to buy stocks at significantly lower prices than a year ago. And bonds have been yielding higher yields for decades, creating opportunities for relatively safe returns between 5% and 6%. “This was the worst year ever for 60% / 40% [stock/bonds] portfolio,” said UBS adviser Brad Bernstein. “But the next decade could be phenomenal because of the current state of bond yields,” he says.

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When retirement is here and now

Of course, many people about to retire look at their financial statements with trepidation because they instinctively understand what academics have studied extensively: portfolio losses in the early years of retirement, when the nest egg peaks and withdrawals can begin. significantly shorten the life of a portfolio.

That phenomenon is known as sequence-of-return risk, and a case study from the Schwab Center for Financial Research shows just how big that risk can be. The study shows that an investor who retires with a $1 million portfolio and takes out $50,000 each year, adjusted for inflation, can expect the portfolio to decline by 15% at various stages of retirement. But the results would be very different. If a recession occurs in the first two years, an investor will be out of money by the age of 18. If this happens in years 10 and 11, he will have $400,000 in savings left in year 18.

To avoid the risk of having to tap into your retirement funds when the market turns south, advisor Evelyn Zohlen recommends setting aside a year or more of income before you retire so you have enough money in your accounts . You don’t have to pull down. Market retires early. “The best protection against a succession of returns is not subject to it,” says Zohlen, who is president of Inspired Financial, an asset management firm in Huntington Beach, California.

In addition to building a cash cushion, investors may want to consider purchasing a home equity line of credit to help pay unexpected bills, says Matt Puller, partner and senior vice president at Sequoia Financial Group in Cleveland. “Your house probably isn’t worth much more than it is now,” he says. “If you have short-term costs, it might be better to sell equity to debt that is 20% lower.”

There are also smart tax measures investors can take when they retire. Zohlen points to donor-advised funds as a convenient vehicle for philanthropically inclined high net worth investors, especially those who can receive a taxable portion of the money from deferred compensation, such as stocks. option, once they retire. “The perfect example is someone who regularly donates to their church and knows they will continue to do so,” says Zohlen. “So in the year she retires, she’ll get a bucketful of money that she’ll have to pay taxes on. Put it in this fund. You get a big tax deduction in the year you really need it, and you can keep donating for years to come [from the donor-advised fund],

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invest during your retirement

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

Bernstein says it uses bonds to generate income for its retired clients, a task now made easier by higher rates. “We want to generate cash flow from fixed income, ideally for living customers,” he says.

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CapTrust’s Rivotto says retirees should consider moving out of the fixed-income portion of their portfolios to give stocks time to recover. Even retirees need stocks to grow the long-term portfolio needed to maintain a 30-year or more retirement. “I get more than 70/30 [stocks and bonds]And that’s because of its longevity,” says Rivotto, who lives in Boston.

Roth conversions are for each stage

While markets have taken a hit this year, there are some bright spots for pension investors. For starters, now could be an ideal time to convert a traditional IRA (which is funded before tax but taxed as retirement income) to a Roth IRA (which is funded with after-tax dollars). financed but have tax-free withdrawals). Roth conversions are taxable in the year you make them, but the potential tax burden for 2022 will be lower as the shares have fallen in value. There’s also an added bonus to doing this before the Trump-era tax cuts expire in 2025 and before income tax rates return to their pre-Trump levels.

Of course, an investor must have the cash on hand to pay the taxes associated with a Roth conversion. Sequoia’s Puller suggests that clients do a Roth conversion while simultaneously creating a donor-advised fund, which “could take some of that pain away through tax deductions.”

Another option is to do a partial conversion. The immediate tax burden will be lower, says Zohlen, and the Roth account can prevent you from moving into a higher tax bracket after retirement because withdrawals are income tax-free.

Advisers say a conversion could also be a smart move for investors who plan to leave a Roth IRA as an inheritance to children or grandchildren, especially if they are in a higher tax bracket. Under current rules, heirs have ten years to withdraw assets from an inherited Roth account. UBS’s Bernstein says he’s made several changes for his customers this year. “To leave a Roth IRA to your kids for them to grow over a 10-year period — that’s fantastic,” he says.

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to spend

Low return expectations for the next decade coupled with longevity risk is one reason some advisors are taking a more conservative approach to retirement withdrawal rates. This is known as the 4% rule, which refers to the idea that you can spend 4% in the first year of retirement and adjust that amount to inflation in later years and grow out of the money. Can’t run out, this was the gold standard that financial advisors use when planning for clients.

“Over the years, we’ve moved to 3% to 3.5% as a safe exit strategy,” said Mark Brookfield, consultant at Merrill Lynch. “We believed that the stock would need to outperform over time for the 4% withdrawal rate to be effective.”

Regardless of which recording strategy you choose, set a budget and stick to it, says Zohlen. This can have a major impact on the success or failure of a retirement strategy. “What makes the 4% rule work is leaving money in the account to work,” she says. “For me it’s not: ‘Does the 4% rule work?’ That is, “Does the client’s behavior allow us to trust him?” ,

Finally, don’t get caught up in the ups and downs of the market, says Sequoia’s Puller. He says perspective is an underestimated part of retirement planning.

“This is the third time I have gone through such volatility in the market,” he says. He remembers proposing to his wife during the financial crisis of 2008-2009. “I thought, ‘Oh my God, what am I supposed to do?’ What I didn’t realize was that the next few years presented wonderful opportunities. Today’s pension investors will probably look back 10 years from now and come to a similar conclusion. As Puller points out, “Right now, it’s hard to see.”

Write to Andreas Wells [email protected]




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