The pandemic brought about over 2.5 million people retiring early, as estimated by Fed analysts. With inflation likely to persist at an elevated rate over the next twelve months, higher living costs will likely take an increasing toll on retirement portfolios as retiree spending needs increase. Tammy Trenta, founder and CEO of Family Financial, a wealth management firm, discussed key retirement planning considerations to keep in mind during a complex market time on Nasdaq TradeTalks.
An increasing number of rising costs need to be calculated into retirement income needs. Alongside increased inflation currently is the rising cost of health care, making saving for the right time horizon more important than ever. There are several ways to calculate retirement income needs, including using the Monte Carlo method to run estimates through several possible market return scenarios over a given timeline that then assigns a probability of success.
Another possibility is to run projections until the age of 100 to ensure clients feel confident in their retirement plans. Whatever method is used, ensuring that a client’s needs are accounted for over a long time horizon and keeping them focused on the long-term while still meeting short-term needs can ensure that retirement plans stay on track even during periods of rocky markets.
Retirement planning is a complex endeavor even for the most seasoned financial advisor because of the individual nature of client needs in retirement. Ensuring they understand the different factors that can affect their retirement portfolios will help them ride out market stress and volatility with increased confidence.
This can mean ensuring a client understands the interplay of social security withdrawals and retirement income, how their portfolio will likely perform in various situations, and what factors can impact their monthly income. It also should include a firm understanding of an individual’s risk tolerance and ensuring their portfolio aligns with that tolerance. Clients that understand how their portfolios should perform in down markets can help instill confidence in their retirement portfolio and keep them invested for the long term when performance may be muted.
Insulate Income from Market Risk
It’s been a particularly unpredictable and volatile year for markets, but volatility is a normal part of market cycles. Given elevated volatility potential heading into 2023, diversifying a client’s money across different investment types, such as money markets and bonds, can provide overall better financial stability and keep them locked into their equity allocations that can generate greater return potential over time.
Strategies include keeping three to six months’ worth of monthly spending needs in a money market — that is currently yielding between 3%-4% from higher interest rates — and three to five years’ worth of retirement income in low-risk, short-term investments such as bonds. “These two strategies allow your money to weather various market cycles and eliminate the need to pull from stocks when they are down,” according to Trenta.
This article was prepared as part of Nationwide’s paid sponsorship of VettaFi.
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