Baby boomers have lived through the tech bubble, the 2008 housing and market crash, and even double-digit inflation in the 1970s, but never all these financial crises together. Now we have inflation, pandemic-related supply chain disruptions, a bear market, higher gas prices, and rising interest rates. That makes an already formidable goal of saving for retirement even more challenging, especially for those approaching retirement in the next few years.
Saving for retirement now requires additional challenges and sacrifices, but also offers some opportunities. Here is how to save for retirement under challenging conditions:
- Adjust your retirement savings plan.
- Re-evaluate your retirement timeline.
- Reduce your retirement spending.
- Stay in the market.
- Stress test your portfolio.
- Consider a Roth conversion.
Adjust Your Retirement Savings Plan
Many people got used to low inflation and low-interest rates over the past several years. “During the pandemic, central banks across the globe did whatever they could to keep their economies going and growing,” says Robert Gilliland, managing director and senior wealth advisor with Concenture Wealth Management in Houston. “Because of that, we’re now looking at inflation that is much higher and interest rates that are much higher.”
Those who are saving for retirement are increasingly aware of the challenges of high inflation. “What you want to do is run your plan to adjust for this new paradigm, which is probably going to be higher interest rates and a higher cost of living,” Gilliland says. “So for those who are planning for retirement, now is not the time to stop saving. They have to review their plans and adjust their inflation expectations and make sure that they’re properly allocated and maintain that long-term perspective.”
Re-Evaluate Your Retirement Timeline
Some people have delayed their retirement because of their fears of inflation, even though they could afford to retire. “They are just going to continue to work for another year to see how this all works out,” Gilliland says.
Nick Foulks at Great Waters Financial in Minneapolis, says his father was thinking about retiring this summer but has now pushed that back to February to let the market calm down. “Sometimes people have to be willing to adjust their timelines based on economic conditions,” Foulks says. “By working one more year or working 18 months more you could be putting yourself in a significantly better position.”
Reduce Your Retirement Spending
You may be able to retire sooner if you are able to reduce your retirement expenses. “You have to re-evaluate your spending,” Foulks says. “It’s important that we spend money on things that are important to us. But when prices are going up and gas prices are rising and the cost of living is adjusting, we have to be willing to make the necessary changes by adjusting our lifestyle and reviewing what is actually important to us.”
Try to find expenses that can be reduced or even eliminated from your retirement budget. “Look at your bank statement for the last month or two and see where you spent that doesn’t necessarily have value to you,” Foulks says. “When a cup of coffee costs you $5 or $6 a day and you multiply that by 20-something working days, you’re spending quite a bit, so there are areas that are not truly of value where you can change your spending habits.”
Stay in the Market
In the first half of 2022, there have been wild swings in the stock market. “We’re not used to this volatility, so we remind our clients that it’s time in the market, not timing the market,” Gilliland says. If you pull your money out of the market before it recovers a temporary loss becomes permanent.
People saving for retirement need to stay properly invested and continue to save. “If you have a five- or a 10-year time horizon, you can make the argument that things are on sale, and maybe they’re going to get cheaper,” Gilliland says. “If you continue to treat yourself like a bill and pay yourself every month, you’re going to end up coming out ahead by dollar-cost averaging.”
Stress Test Your Portfolio
Run the numbers to make sure your portfolio will be able to cover your retirement expenses under a variety of different conditions. Consider scenarios such as stock market losses and high inflation. “Stress test your portfolio,” Gilliland says.
For example, find out how long your retirement savings will last if your retirement costs increase due to high inflation. “A lot of financial planners have been using, up until recently, an inflation rate of 2.3%, which is a long-term average. Well, we’re clearly in a much higher inflationary period and probably will be for some time, though it may be moderating,” Gilliland says. “Run your plan to adjust for this new paradigm, which is probably going to be higher interest rates and a higher cost of living.”
Consider a Roth Conversion
It can make sense to convert your tax-deferred retirement savings to an after-tax Roth account while the value of your retirement account is reduced. When you convert to a Roth you pay income tax on the amount converted and then withdrawals in retirement are typically tax-free. Since the value of your IRA portfolio is down, your tax obligations would also be reduced. If you have a portfolio that’s dropped in value, you would be paying taxes on the smaller Roth conversion, and then you won’t have to pay income tax on future recovery gains in the Roth account.