Retirees and investors on the cusp of retirement are under stress this year. Inflation has spiked to multidecade highs, stocks have tumbled, and bonds—a haven in normal times—have slumped. The traditional portfolio consisting of 60% stocks and 40% bonds has 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 mid-November Fidelity report finds the average 401(k) balance has fallen 23% this year to $97,200. Not surprisingly, a majority of high-net-worth investors now expect to work longer than they had originally planned, a Natixis survey finds.
“Retirees are feeling the pressure,” says Dave Goodsell, executive director of the Natixis Center for Investor Insight. “Prices are going up, and the cost of living is a real factor.”
Investors’ retirement concerns aren’t unfounded, but it isn’t all doom and gloom. Rather than focusing on the losses of the past year, take a longer-term view and think about opportunities to make and save more in the next 10 years. Whether you’re on the cusp of retirement or already past your working days, exploring new tactics and committing to sound planning can help you take advantage of opportunities ahead and perhaps turn some lemons into lemonade.
“You don’t need a miracle,” says Goodsell. “You need a plan.”
Advice for Pre-Retirees
If you’re still gainfully employed, next year will present solid opportunities to build your nest egg, thanks to the Internal Revenue Services’ updated contribution limits. 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, courtesy of inflation adjustments.
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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, an increase from $6,000. The catch-up contribution for IRAs remains $1,000. “You’ve got to take advantage of that,” says Brian Rivotto, a Boston-based financial advisor at Captrust, who is recommending that some clients max out their contributions.
Stock market returns are expected to be in the single digits for the next decade, but investors can also take advantage of the opportunity to buy stocks at far lower prices than a year ago. And bonds are yielding more than they have in decades, creating the opportunity for relatively safe returns in the 5% to 6% range. “This has been the worst year for the 60%/40% [stock/bonds] portfolio,” says UBS advisor Brad Bernstein. “But the next decade may be phenomenal because of where bond yields are now,” he says.
When Retirement Is Here and Now
Of course, many people on the cusp of retirement look at their year-end account statements with trepidation because they understand intuitively something that academics have studied extensively: Portfolio losses in the early years of retirement, when the nest egg is largest and withdrawals begin, can shorten a portfolio’s life span significantly.
That phenomenon is known as sequence-of-returns risk, and a case study from the Schwab Center for Financial Research illustrates how big that risk can be. The study finds that an investor who starts retirement with a $1 million portfolio and withdraws $50,000 each year, adjusted for inflation, will have a very different outcome if the portfolio suffers a 15% decline 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 it happens in the 10th and 11th year, he or she will still have $400,000 in savings left by year 18.
To avoid the risk that you’ll need to tap your retirement funds when the market has turned south, advisor Evelyn Zohlen recommends setting aside a year or more of income before retirement so that you don’t have to draw on your accounts in a down market early in retirement. “The best protection against sequence of returns is not to be subject to them,” says Zohlen, who is president of Inspired Financial, a wealth management firm in Huntington Beach, Calif.
In addition to building 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 of Sequoia Financial Group in Cleveland. “Your house is probably never worth more than it is now,” he says. “If you have a short-term expense, it may be better to take out that loan than sell equities that are down 20%.”
There are also smart tax moves that investors can take as they retire. Zohlen points to donor-advised funds as a handy vehicle for charitably minded high-net-worth investors, particularly those who may be getting a taxable chunk of cash from deferred compensation, such as stock options, just as they retire. “The perfect example is someone who donates regularly to their church and knows they’ll continue to do that,” Zohlen says. “So, in the year she retires, she’s getting a bucket of cash that she’ll get taxed on. Well, put it in this fund. You’ll get a big tax deduction in the year you really need it, and you can continue giving to charity for years…
Read More: How to Keep Your Retirement On Track in an Unpredictable Market