The retirement plan always comes at the top of the priorities, but the approaching retirement age may turn into a heavy nightmare for anyone at a time when stock markets are declining and inflation rates are rising, and the world is approaching the specter of economic stagnation in light of foggy global economic expectations even in the strongest economies.
The scene in the past years was, of course, encouraging, especially for those who invest their retirement portfolio in the stock markets. The “S&P 500” index nearly doubled its gains in three years until 2021, which led many to believe that they had achieved their financial goals, but with the transformation of investment prospects, it became daunting. Investors should reconsider retirement strategies.
In the following lines, we offer a number of recommendations and tips for a safe and comfortable retirement.
Make a comprehensive plan
In the beginning, when you plan for retirement, you must think about the cost of everything comprehensively. You do not know what prices will look like in the future. Although inflation rates have been stable, even low in the United States and Europe over the past ten years, they are now near Highs in forty years and then you should assume that prices will rise in the coming years.
You should also calculate your daily expenses to include factors such as housing costs including rent and maintenance, healthcare costs, daily living such as food, clothing, transportation, and even leisure and travel activities.
Next, calculate all your post-working income, including your employment pension and any other forms of income such as rent, and then compare your income and expenses and you’ll get a good idea of what you’ll need to allocate to your retirement plan.
It can be hard to say how much savings is needed when it comes to retirement savings, but many experts say that an average of 15 percent of income looks good and of course this number comes as a surprise because the typical rates for savings for retirement under many programs are 3 percent or less. The savings rate should also increase if, for example, she is saving on behalf of your spouse.
Time is the most important asset
Experts say that many investors lack the most important asset class in retirement planning: time. A Bankrate survey found that about 36 percent of respondents do not have a retirement account. Those missing out on saving for retirement also expressed financial regret. Of course, the feeling of remorse is justified, because every year you don’t invest in and don’t use your money, you could incur tens of thousands of dollars in costs in the future.
Experts say it’s possible to start setting aside money for retirement in your late thirties and early forties, because waiting any longer is not helpful as you’ll need time to put money into your retirement portfolio for that money to grow. Of course, the longer you wait, the more effort you will have to put in each year.
It is also a good idea to create an integrated budget for your current situation that takes into account all of your sources of income and daily expenses, as well as the amount you will need to save each month based on your goals for retirement, and to make retirement savings an item in your budget just like food and housing costs.
work longer
Some experts argue that to try to ensure a comfortable retirement, some who want to retire early work for a few more years.
Nicole Sullivan, co-founder of Prism Planning Partners, says that inflation fears are driving more of her company’s clients to maintain a presence in the labor market. For example, when some teachers retire from their school work, they continue to teach part-time even after they reach retirement age.
Similarly, John Olin says that some of his clients who retired without saving enough to secure a large retirement pension decided to work in jobs different from their original professions. In the Uber app or even work for local nonprofits.
Olin added that some of them do not need the money immediately, but they just do not want, for example, to liquidate their portfolios of stocks at a time when the market is declining.
Prepare for rising healthcare costs
Health care costs can eat up a large portion of retirement assets as they continue to rise. According to a recent survey, a third of retirees are not confident that they have enough money to cover medical expenses and more than half are not sure they can manage those expenses in the long term.
The best way to cover these expenses may be to buy long-term medical care insurance, and the golden rule here is to implement this sooner rather than later, the younger you are when buying insurance, the lower the value of the annual premiums.
Investing in stocks
The majority of savers invest in stocks either directly or through a mutual fund or ETF. Despite the current decline in global stock markets, analysts believe that stock prices tend to rise in the long term. Since 1926, the S&P 500 index has recorded an average annual return of 10.24 percent with the reinvestment of dividends, according to the S&P Dow Jones Indexes.
Historically, stocks have generated 4 percentage points higher annual returns than, say, bonds, and that spread is widening, according to Chad Holmes, a financial planner and founder of Formula Wealth. Chad believes that shifting from a mixture that allocates 60% to stocks compared to 40% for financial instruments with more stable returns to a more conservative mixture of 30% for stocks compared to 70% for other instruments would reduce the annual return for the portfolio owner by one to two percentage points annually, depending on performance of each asset class.
The downside, of course, is the decline in stocks. During the Great Depression of 2008, and the most recent crash due to the Corona pandemic, stock prices fell by more than 35 percent, which represented a crisis for those of retirement age.
However, there are bright spots in the stock market offering a wide range of options, depending on your level of risk tolerance. If you are willing to take high risk, you might design a portfolio that includes sectors with higher growth potential but higher volatility such as technology, while more conservative investors may focus on large companies in the financial, consumer and industrial sectors, which usually achieve lower gains but with lower volatility. .
Experts also recommend investing in stocks of commodity producers and inflation-related derivatives in times of volatility, as well as stocks of companies with strong brands and large capital that do not find themselves forced to the roads of the money markets, including stocks that offer profits ranging from 2 to 4 percent which will give you a return while you wait for the market to improve.
At the same time, experts warn that investors who buy more shares must be sure that they can withstand greater volatility. So financial planners are advised to invest in diversified stock funds rather than individual stocks or limited sectors.
You should keep the time factor in mind, it is prudent to buy income-producing securities that offer profits while holding them for periods ranging from two to ten years and reduce provisions for complementary products. The same applies to the longer-term category of the portfolio, which is desirable to consist of growth stocks, as the investor should expect to hold these stocks for ten years or more in order to keep pace with inflation.
What do I do when the market relapses?
On top of the advice, don’t panic. Acting out of fear in making portfolio decisions is rarely helpful, so you should explore your options before you have to act.
Experts also say that adopting an approach to reduce the size of investment in stocks in the event of a downturn may be useful in reducing volatility in the portfolio, but it may lead to losses in light of the downturn in the market and may make the recovery in the future more difficult. While this is an automatic reaction, selling stocks in a bear market may be the worst decision you can make because it means that you will miss the opportunity to recoup those losses if the market rebounds.
Therefore, experts advise not to rush to sell the losing shares or liquidate the portfolio, but rather commit to investing your monthly savings, although you lost some of these provisions with the decline in prices, at the same time you will buy shares at low prices, to rise after that over time.
Some say that a balanced action is required, and that a quick shift, for example, to investing in the stock market in order to compensate for losses may be an irrational gamble, and the shift to fixed income investments may deprive investors of financial tools to hedge against inflation.
Analysts also say that if you have some time before retirement money is used, you should make a slight shift in favor of fixed income products, with the expectation that your portfolio may recover at a slow but sure pace.
Also, for those who need to use their retirement funds in two to five years, fixed income products may be a good option.
Get help
If the task of planning seems daunting, don’t hesitate to get help. Building a long-term relationship with a financial planner who guides you through all steps of the process of building your retirement portfolio can reduce confusion and help you set your goals faster. There are financial companies with specific programs that offer individual guidance as well as educational materials to help develop a retirement strategy that is especially suitable for you.