Wealth Planning

Navigating retirement planning through volatility

  • Having a solid retirement plan is at the core of any successful financial strategy. But 2020 certainly didn’t make that task easy.
  • Checking in on your retirement strategy—at least annually—is a good idea, regardless of economic or market conditions. Start with asking yourself: have my goals changed?
  • Incorporate Social Security and explore Roth conversions to potentially refine your retirement plan.


 

Navigating retirement planning in normal times—without high levels of unemployment, volatile markets, and an election around the corner—is hard. But 2020 has made that task even more complex and, at times, confusing.

That is why now may be a good time to revisit your retirement strategy based on the lessons we’ve learned this year.
 

Revisit your retirement planning goals.

Pandemic economy or not, it’s a good idea to revisit your retirement strategy every-so-often—annually is recommended. But checking in doesn’t necessarily mean making drastic changes.

The first question to ask yourself is: Has the pandemic resulted in you needing to rethink your goals?  Are you aiming to retire early, spend differently or just have different priorities as a result of this years’ experience? Ensure that you are factoring that in your goal.

If you experienced income interruptions or had to take on significant expenses in the past months, there are ways to help bridge that gap. Tally up the numbers: you might need to tweak your budget, consider such options as planning to retire later, downsizing your home, or reducing the amount you’re putting towards your child’s education. There are many options to explore and when it comes to making adjustments, keep in mind that extremes aren’t always the answer. Consider connecting with a financial advisor to better navigate those options.

While you’re at it, make sure that your current estate plan is up-to-date and reflects your wishes. This may include reviewing your beneficiaries and checking on important estate planning documents, such as wills, trusts, and healthcare proxies.
 

Stay invested to cover growing costs.

Understandably, many cautious investors held on to more cash than usual to avoid the drastic market swings in the spring. But now that the dust has settled, some of those investors continue holding cash or money market funds 1  In addition, this year has shown many of us that we probably could be spending less, so if you haven’t had an income disruption, you may have some excess cash. Holding on to that cash in the current low-rate environment, may not be the best approach, and can actually hurt your chances of not only meeting your goals, but outpacing inflation alone.

Waiting for the perfect moment to get invested—trying to time the market—is likely to cost you in missed earnings. This is partly because the worst days of the market are typically very close to its best days. For instance, between 2000 and 2019, six of the best 10 days for the S&P 500 occurred within two weeks of its worst days 2 . And to illustrate the potential impact: $10,000 fully invested in S&P 500 in that period would result in a $32,421 total return. If the same $10,000 investment missed just the 10 best days in those 10 years, the total return would be $16,180—about half.

And once you add the growing costs of healthcare and the need for long-term care, staying invested becomes even more critical.

Average annual Medicare costs experienced by today’s 65-year-olds is expected to triple over the next 30 years, due to higher than average inflation for healthcare expenses, increased use of healthcare at older ages, and increasing supplemental coverage premiums 3 . So when planning for retirement, it’s prudent to assume a 6% annual increase in healthcare costs, and make sure your strategy accounts for that inflation. And these costs typically don’t include most long-term care expenses. At age 65, about 1 in 10 men and nearly 2 in 10 women may end up needing significant care for 5 years or more 4 .

Take some time with a financial advisor to see if your current strategy accounts for these growing costs.
 

Incorporate Social Security.

While you may not need any major changes to meet your goals, there may be some opportunities to maximize your retirement strategy.

And a good place to start could be Social Security. Social Security can be a significant part of your retirement income, replacing about 40% of preretirement income for an average worker 5 . But the timing here is key: if you begin collecting Social Security the minute you are allowed to—which is currently age 62—your benefits may be lower than if you wait until your full retirement age or age 70. On the flip side, if collecting sooner allows you to remain more disciplined in your investment strategy, claiming early may be something to carefully considerYou should discuss with your financial advisor the various scenarios and understand the benefits and tradeoffs before making a decision.

Of course, when including Social Security in your strategy, it’s important to consider the health of and the potential changes to the system. According to the 2020 Social Security Board of Trustees report, while the trust fund is likely to be depleted by 2035, current payroll taxes are projected to fund 75% of Social Security benefits through 2091. Therefore, even younger workers are likely to receive some of the benefits. Today, there are a number of proposals being discussed, including increasing payroll taxes and increasing the overall retirement age, to help ensure that Social Security is fully funded in the long-run. If you are in or nearing retirement, these changes are unlikely to affect you. For younger workers, it’s important to keep an eye out for any potential changes and begin planning as soon as possible.
 

Explore strategic Roth conversions.

Another opportunity to consider for refining your strategy is traditional-to-Roth IRA conversions. While both accounts are used for retirement savings, if you hold a Roth IRA you are not required to take out regular distributions in the future. Plus, withdrawals that meet certain requirements are free of federal income tax. Here are a few considerations before you convert:

  • Keep in mind, depending on the size of your account and your tax bracket, you may need to pay a large tax bill the year you convert to a Roth.
  • Completing periodic conversions—instead of in-full—could help you control the tax impact and is typically a recommended approach.
  • If you expect your tax bracket to increase going forward—resulting in a potentially larger tax bill if you convert or withdraw in the future—then switching now may save you money. Here too, it may pay to consult a financial or tax advisor. Here’s a deeper dive on considerations for traditional-to-Roth IRA conversions.

Carefully considering your tax brackets when making Roth conversion decisions is key. For one, Roths can help you transfer the most value to your beneficiaries.  If there is a large traditional IRA transferring to a few beneficiaries who are in their peak earnings years and will be taking distributions (either voluntarily or as required minimum distributions), this can erode the amount of wealth transferred. Conversely, a Roth can be tax-free to beneficiaries (after the five-year Roth holding period has been met). Systematically converting over time at relatively low tax brackets, when compared to your heirs, may mean more wealth transfer to your beneficiaries.

The new RMD age of 72 may give you more years to convert potentially larger amounts– so don’t wait for the RMD and the tax surprise, work with your tax or financial advisor to smooth taxes through retirement.


1. EPFR, JPM CIO Team, as of August 2020
2. J.P. Morgan Asset Management analysis, using data from Bloomberg, as of December 31, 2019
3. Employee Benefit Research Institute (EBRI) as of January 25, 2020; SelectQuote as of January 25, 2020; Milliman as of January 25, 2020; CMS website as of January 25, 2020; Consumer Expenditure Survey as of January 25, 2020; Healthinsurance.org as of February 3, 2020; J.P. Morgan analysis.
4. U.S. Department of Health and Human Services, Administration on Aging statistics last updated October 10, 2017. Most recent data available as of January 28, 2020.
5. JP. Morgan Asset Management, 2018.

 

 

 

 

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