Planning for the Future: Live Your Later Years in Comfort

With a volatile stock market, high inflation, and fall-out from a devastating pandemic, many individuals are concerned about saving enough to maintain a comfortable lifestyle in retirement.

Because of the stock market’s volatility, investors should reevaluate their retirement plans and strategies to make sure they are still on track to meet their financial goals, said Katie Bruno, financial advisor at Morey & Quinn Wealth Partners.

“Right now, the bond market is actually down more than the stock market,” she said. “For those who are entering retirement and need income from their portfolios, it’s important that [they] look at what their allocation is to fixed income versus equities and make sure they still meet their retirement goals and withdrawal strategies.”

There seems to be a lot of momentum in Washington D.C. to help retirement savers, according to Justin Vossen, investment adviser and principal at Lutz Financial. The new Secure Act 2.0 already passed by the House, but not yet the Senate, allows for auto-enrollment with escalators each year up to 10% of pay. Auto-enrollment in 401(k) for employees has dramatically aided overall savings rates of America’s workers.

“Other incentives are now permissible via the Secure Act to aid in getting employees to contribute,” Vossen said. “They also proposed stair-stepping the starting age for required minimum distributions over the next 10-years, all the way up to 75 by 2032.”

The House legislation aims to increase the amount individuals can save for retirement, and it plans to increase the number of people who have access to a retirement plan through their employer, according to Matthew Munyon, retirement plan administrator at Swartzbaugh-Farber & Associates.

“Part of the plan will allow for employers to give a matching contribution to employees within a retirement plan for those repaying high student loans which may impede their ability to defer salary through their employer-sponsored retirement plan,” he said. “This will hopefully get more people to start having contributions made on their behalf earlier in their life, and lead to increased account balances, which will hopefully leave them more prepared for retirement.”

In addition, Environmental, Social, and Governance [ESG] investing will continue to increase. Inflows into ESG investing doubled from 2020 to 2021, and total investment in these funds is predicted to reach $30 trillion by 2030, according to Broadridge.

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“[ESG funds] have demonstrated a strong staying power and competitive returns,” Munyon said. “The importance of these funds can be demonstrated by this point: 77% of all ESG funds that have been around for 10 years have survived and are still open for investment, compared to 46% of traditional funds.”

Best Strategies for Those Over 60

Investors over 60 should diversify their investments and re-evaluate their strategy periodically.

“Make sure that you have your assets spread across the market sectors that are appropriate based upon your individual risk tolerance,” Munyon said. “Modify or re-affirm your strategy to suit your situation.”

Everyone’s investing strategies will be a little different depending on what kinds of income sources they’ll have in retirement. For instance, will they have a pension — which are becoming scarce — or will they rely only on Social Security?

“I tell people they should build their investment strategy based on what they need and not just their age,” Bruno said. “A lot of investors nearing retirement have little to nothing in Roth IRAs because they weren’t funding a Roth IRA for years. The closer you get to retirement, the less time you have to fund something like a Roth IRA or a health savings account (HSA). Those are two containers (part of your bucket strategy) you should be looking at.”

“The best thing for folks to remember at age 60 is that they still may have a long life expectancy even after retirement,” Vossen said. “Investment strategy is a very personal decision based on a number of inputs, but those over 60 still need to plan for a 20- to 40-year time horizon. So, many can’t afford to be too conservative, too quickly.”

Impact of Inflation

Many people are worried about putting cash in their savings accounts to work in the stock market because of the uncertainty. Also, because this is an election year, there’s always some concern about what will happen with policy and how that will affect personal finances.

“If you look back over the history of the stock market, look at the different assets [such as] fixed income, stocks, and oil prices going back to the 1920s, stocks have always had the highest return,” Bruno said.

“If you’re in inflation, historically-speaking, the only way to outpace inflation is to be invested in the stock market. But that’s not to say your entire portfolio should be in stocks; you have to have a diversified portfolio.”

One advantage of investing in the stock market amid rising inflation is to preserve your portfolio’s buying power. As inflation rises and the dollar buys less, you’ll need more dollars to purchase goods and services, so trying to achieve a higher return on your portfolio will help.

Another advantage is that inflation may be a wake-up call to diversify your holdings and spread them out among different asset classes to mitigate the risk of concentrated holdings in a particular area that may be sensitive to higher inflation.

One disadvantage of investing in the stock market is that you may be taking on increased risk exposure to achieve the gains you feel are necessary to get the returns you want. Also, your longer-term bonds may lose some of their value as inflation rises lead to interest rate hikes.

If you have a long-term investment strategy in place, it is important to weigh your options carefully.

“It may not be a good idea to let short-term conditions alter your strategy too drastically,” Munyon said. “Stay on the path you have chosen, or re-visit your risk tolerance to determine if it is the correct path. If the potential for large short-term losses is too high of a pain threshold for you, then make some adjustments so you can have some peace of mind. If you can tolerate it, stick to your path.”

Long-term inflation is bad for most investments as real rates of return are reduced by the increase in the inflation rate, and stocks are no exception.

“Rising costs can hurt profits for companies if they cannot maintain their profit margins by increasing prices; however, stocks that produce cash flow regularly are less affected by rising inflation.” Vossen said. “Other stocks, such as growth stocks, that produce less dividend cash flows tend to struggle more.”

“Think about what you’re trying to accomplish with your investments and how far into the future that is,” Bruno said. “If you’re planning to make a purchase or fund a goal within the next year maybe the stock market isn’t the right place for your money. Maybe it’s better being preserved in a Money Market or your bank account for safety purposes.

“If you’re talking about funding goals that are five, 10, or 20 years out, you have to drown out the noise going on right now around inflation. Inflation is real, but 20 years from now this is going to be a blip.”

Pandemic Influences

Munyon believes that many people saved a lot of money over the past two years.
“With so many events, restaurants, [and] cultural centers closed for the pandemic, a lot of people saved money they may have otherwise spent on entertainment or travel,” he said.

“I know a lot of people who invested their stimulus checks into Roth IRA’s or other investments. I also believe that we learned the importance of having a short- to intermediate-term savings account due to the COVID lockdowns.

“Everything can change very quickly, and having six months or longer of your expenses saved up in a safe, liquid place is vital.”

The pandemic did two things for Americans, Vossen said. It slowed the spending rate for a period of time as everyone stayed home, and the government stimulus provided additional cash.

“Savings rates skyrocketed for much of 2020 and part of 2021,” he said. “This is moving in reverse as we emerge from the pandemic and begin some more normalized activities, and Americans are spending more. Perhaps many are reprioritizing things they spend on and save for? Time will tell.”

Right now Americans have more cash than they had pre-pandemic, largely because of the stimulus and Paycheck Protection Program [PPP] loans, Bruno said.

“You see baby boomers who maybe had originally planned to work until they were 68 or 70 years old [retiring] in their early 60s,” she said. “I think that certain jobs such as health care and teaching are more stressful. They’re realizing that they can retire earlier so they are.

“There’s a lot more awareness around investments because we’ve have the most volatile 36 months of stock market ups and downs, and I think it’s caught peoples’ attention more than it has in the past 10 years.”

Investment Strategies

We live in a country where changes in the tax code come often, so having different types of accounts like Roth IRA, Traditional IRA, and taxable accounts provide flexibility for retirement income.

“The future of income tax, capital gains, and qualified dividend taxation is uncertain,” said Justin Vossen, investment advisor and principal at Lutz. “Thus, having flexibility in where you distribute your future retirement income will be very important to minimize taxes as things change.”

A Roth IRA is funded with after-tax money, so you won’t have to pay taxes on money you withdraw.

Many investors need to look at the options available to them for Roth IRAs and Roth 401(k)s and even after-tax contributions inside of 401(k)s.

“Employees should demand from their employer Roth availability inside of their 401(k), which provides for future tax-free growth and tax-free distributions,” Vossen said. “Normal taxable investment accounts are also beneficial as a diversifier to future tax rates.”

With a Health Savings Accounts (HSA), you can get a tax deduction today, and the invested money will grow tax-deferred.

“The moment you use it for medical expenses it’s tax-free,” said Katie Bruno, financial advisor at Morey & Quinn Wealth Partners. “I don’t think enough people are taking advantage of them. [If] you continue to fund it so when you retire you’ll have a substantial amount in the HSA which you can use to pay for several of your retirement expenses, including Medicare premiums.”

A 529 College Savings Plan can be used to save money for a college education.

Contributions to a of up to $10,000 are tax deductible in Nebraska, and the earnings aren’t taxed if they are used for education.

“I think people get caught up in not funding an HSA or a college account because they [are concerned] about what happens if they don’t need it,” Bruno said. “The reality is you would have paid taxes if you’d just invested the money without doing it in this kind of vehicle or container.”

If you give to nonprofits, consider making the contribution in a more tax beneficial way through charitable trust or taking the money from your retirement account.

“At age 72 you’re required to take money out of an IRA, which is called a required minimum distribution,” Bruno said. “You could give that money to a charity and avoid taxes on it altogether. Often I see clients who are giving to a charity, but they aren’t doing it in a way that’s best for their tax situation.”