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How To Build Financial Resilience for a Long Retirement Average life expectancies are rising worldwide. Accelerated medical science, poverty alleviation, and modern technologies have contributed to improved public health and medical interventions in the US and elsewhere, so life...

By Chris Porteous

This story originally appeared on Due

Average life expectancies are rising worldwide. Accelerated medical science, poverty alleviation, and modern technologies have contributed to improved public health and medical interventions in the US and elsewhere, so life spans have been continually getting longer, leading to older populations with changed outlooks and needs.

The impact of modern science, improvements in living standards, and technological advancements has been markedly pronounced in the last 200 years. In the 1800s, most of the world had a maximum life expectancy of about age 40.

While wealth increased in some countries in the 1900s, the global average life expectancy remained at 32. Fast-forward to 2021, and things drastically changed. Life expectancy in the last century more than doubled—it was 71.

According to global statistics from the United Nations Population Division, females today are expected to live 70.6 years, and males to 70.8 years on average. Both sexes have a combined life expectancy of 73.4 years.

The 2024 life expectancy in the US is 79.25 years—higher than the global average. This figure is a 0.18% increase from 2023. Every day in the US, about 10,000 people turn 65 years old. By 2050, the number of people to reach 65 will exceed 88 million. That means 20 percent of the US population will be senior citizens—a growing demographic requiring a new retirement strategy.

While it may be good news on the personal and health front, a longer potential life span concerns retirement savings. As the economy becomes more volatile and uncertain, with threats of inflation, a cost of living crisis, and a recession constantly looming on the horizon, retirees are becoming increasingly worried about the resilience of their portfolios.

How will older persons accommodate more significant economic uncertainty over a long period despite decreasing income? Can retirees’ savings withstand the trend of extended life expectancies?

The Case for Building a Resilient Portfolio

With the 2024 US life expectancy approaching 80 years, the retirement landscape is feeling the crunch. It is being forced to reevaluate itself due to the pressures of change. The prospect of extending one’s savings for many more years or decades is daunting to many pre-retirees and retirees, who may not have prepared enough resources for such a long stretch.

Today’s retiring generation is faced with the problem of portfolio resilience. In a 2023 Edward Jones and Age Wave survey, retirement resilience was a primary concern among US respondents. The survey revealed that only 30 percent of respondents were confident about being able to afford a secure retirement lasting about twenty years.

When asked whether they could afford a thirty-year retirement, the number dropped sharply to half—a mere 15 percent were confident about their odds.

Unfortunately, a twenty to thirty-year retirement is fast becoming the norm. It is assumed to be the typical scenario for retirees or would-be retirees.

Questions loom about how those considering or in retirement can build and allocate a portfolio that can withstand the numerous possibilities and events that could occur within a more prolonged time frame, such as healthcare emergencies, market crashes, geopolitical crises, and inflation.

What is driving the fear?

BlackRock’s “Read on Retirement” survey shows a worrisome trendline. The report provides a detailed picture of the decreasing confidence among workplace savers about retirement. There was a stark drop in confidence in 2023 compared to 2022.

By drawing a three-year trendline from 2021, the asset manager believes the trend is cause for concern. The factors driving current worries among respondents include:

Inflation

Eighty-six percent (86%) of workplace savers today are concerned about the impact of inflation on their retirement savings. The erosion caused by inflation has a palpable effect on retirement savings.

The recent acceleration in consumer goods prices has pushed inflation to the forefront of investors’ consciousness. Even when inflation is 1 to 2 percent, it significantly affects retirement portfolios.

For example, if inflation averages 2 percent for 30 years, a million-dollar portfolio would only afford a lifestyle over half what it can give you today. Hence, to make up for that level of inflation, you would need about $1.8 million in 30 years to live the same lifestyle you did at the beginning of your hypothetical retirement. This case demonstrates how steady inflation, even at the lower end of the spectrum, can have substantial effects over time. If you don’t find ways to adjust, your quality of life will suffer.

Market volatility

Ninety-three percent (93%) of respondents worry about market volatility negatively impacting their savings. Economic indicators, investor sentiment, and geopolitical events all influence financial markets. Volatility erupts when such factors cause significant asset price fluctuations, thus increasing risk.

The workplace savers who participated in the survey were right to be concerned. Market uncertainty impacts retirement planning in several ways, including declining investment portfolios and reduced savings. In addition, ROIs also decrease during market downturns, disrupting long-term financial goals.

Lack of retirement income

About 71 percent of respondents were worried about outliving their retirement savings. Workers today are still contributing to their retirement plans at rates similar to those in 2022—however, as many as 30 percent plan to delay retirement due to worries about the future.

In addition, 62 percent report that volatility-related difficulties and inflation have considerably set them back from their savings goals. In 2022, only 42 percent reported this concern.

Such concerns are not yet resulting in a decrease in the savings rate. However, BlackRock believes we are at a critical juncture. We are still at a point wherein we can still turn around retirement confidence by developing strategies to help workers and all retirement planners navigate what is believed to be an increasingly uncertain future. Different generations, particularly Gen Z, demand sound retirement planning advice.

What Makes a Resilient Portfolio?

The greatest fear of retirement planners is needing more money to weather their later years. Building resilience is difficult—investors consider retirement portfolio resilience among the most significant challenges when formulating an investment strategy. This issue is because retirees have different priorities from those who are still accumulating assets at the prime of their lives.

Pay Attention to the Unique Requirements of Retirees

Retirement differs from other life phases. It is all about transitioning from wealth accumulation to a phase of “de-accumulation”—a time of preservation and distribution. It is a turning point in life and thus requires a different approach from when you were in an aggressive accumulation phase.

When you retire, you must consider cash flow management, inflation management, health care costs, living conditions, possible jurisdictions to stretch your dollar, and managing investments throughout retirement.

Some retirees are highly dependent on Social Security, a phenomenon that is becoming increasingly common and is a cause for alarm. Social Security only supplants 40 percent of pre-retirement earnings. Ideally, retirees will have to derive the rest of their lifestyle expenses from their savings, investments, and other portfolio components.

Moreover, old asset allocation formulas may not be faring as well in today’s environment. The year 2022 was particularly brutal for bonds. That was when the trusty 60/40 ratio between stocks and bond investments didn’t do well.

The 60/40 portfolio, revered as a trustworthy guidepost for moderate-risk investors, experienced one of its worst years on record, with both sides of the portfolio under pressure.

People are questioning whether the tried-and-true formulas of the past still hold in an economic climate such as this. Since the pandemic, governments have struggled to control inflation, which has wreaked havoc on cash savings. Liquidity has also plunged, and due to high-interest rates, there has been less venture capital to fuel growth.

While investors must not pay too much attention to the changes to their portfolios in the short term, they must consider other strategies that offset the impact and protect them from such events.

Before delving into the complexities of a multi-decade portfolio, we must go into the essential criteria for a flexible, adaptable, and secure portfolio for the long term.

Seasoned investors say an all-weather portfolio typically comprises cash, high-quality bonds, and a broadly diversified equity portfolio. Some financial advisors even believe there is no need to add or layer alternatives into the mix—the three would typically suffice. Whatever your investing style, you must factor in your risk tolerance, lifestyle aspirations, and financial goals.

A Framework for Retirement Investments

Even in pre-retirement, you must have a clear vision of investing and strategizing to suit your financial goals. Among the foundations you need to work on are:

  • Clarity about your future lifestyle and spending needs
  • Avoidance of impulsive decisions based on strong emotions like fear
  • Consideration of annuities as a means of protecting your income
  • Building tax efficiency into your portfolio
  • Having enough cash in one “bucket” to handle short-term goals and emergencies
  • Decreasing the risks of a sequence of returns
  • Ensuring that your portfolio is diversified
  • Having enough income-producing or high-growth equities in your portfolio
  • Managing your real estate investments properly
  • Consulting financial planners and tax experts
  • Periodic review of your investments

How To Build a Resilient Portfolio That Lasts Decades

A resilient portfolio is an approach rather than a cookie-cutter formula. The best portfolios can be readjusted and revisited over time, with enough assets in resilient “buckets” that help offset each other in times of turbulence.

Diversification is still a fundamental principle for building a retirement portfolio. However, it is not the end-all strategy, as retirement requires paying attention to the changing needs of those who want to stretch their life savings for a multi-decade run across what could be numerous financial minefields. The following principles and qualities differentiate a resilient portfolio:

Set aside one year of cash

Retirees or pre-retirees must set aside enough cash to supplement their recurring retirement income sources. Such recurrent sources include steady passive income from alternative investments like real estate.

Some insights and financial planners recommend one year of cash for retirement. At the beginning of each year, retirees should ensure they have enough money in a liquid account to supplement or even buffer their income from Social Security, rental properties, annuities, pensions, and other sources.

Create a reserve to cushion you from downturns

You must create a short-term reserve in your investment portfolio in addition to your cash bucket. These reserves should equal two to four years of living expenses and may be allocated to fixed-income investments such as high-quality short-term bonds. The reserve you build may shield you from a market downturn.

Choose from safe investment options.

You must be familiar with safe investment vehicles such as:

Annuities

Annuities provide a form of guaranteed income throughout retirement.

Money market accounts

Money market accounts are deposit accounts paying interest based on current money market interest rates.

Certificates of deposit or CDs

Certificates of deposit are savings accounts that hold fixed amounts of money for set periods. The issuing banks pay interest on these deposits.

Treasury bonds

Treasury bonds are a favorite of retirement planners. They are fixed-rate US government debt securities that mature between 10 to 30 years.

Apply the bond ladder strategy in managing investments

A CD or bond ladder strategy can be an alternative investment management method. This option allows you as an investor to respond quickly to changes in the interest rate—an option relevant to our present economic climate.

The bond ladder strategy involves setting up a portfolio of individual bonds that mature on different dates. For example, you can create a ten-year bond ladder with bonds maturing yearly. When the bonds at the ladder’s lower end mature, you can reinvest your proceeds in new long-term bonds.

Invest the rest

The balance of your retirement portfolio can be invested based on three criteria: risk tolerance, time horizon, and unique personal goals. In this case, you may need a retirement calculator to ensure proper allocations based on your criteria.

Diversification, as mentioned, is a cornerstone of investing no matter what. You must hold a well-balanced portfolio of cash, stocks, and bond investments. Your diversification may include alternative assets like real estate, collectibles, crypto, and art.

While less liquid, these can generate exponential gains, become growth drivers, provide you with additional income, and preserve your capital.

To streamline investing, you need to set up a reliable online brokerage account wherein you can adjust your investment strategies as personal or external circumstances change.

Look beyond 60/40

Those wishing to surpass the simple 60/40 ratio can diversify into return-enhancing asset classes. Given the failure of the ratio to reward investors in 2022, some financial advisors and managers believe there is room for change. Traditional equities represent a large proportion of many conventionally structured portfolios.

A typical moderate-risk portfolio may have up to 80 percent of risk from core equities. This figure could mean an under-representation of other income-generating assets.

Long-term opportunities may exist in international small caps, liquid alternatives, emerging market equities, private equity, real estate, and credit. These underrepresented assets may offer more significant potential for alpha, return enhancement, and diversification.

Understand the types of investment accounts in retirement and their tax treatments

There are eighteen types of retirement investment accounts, but we won’t go into those in full detail. We will, however, zoom in on the three types of tax treatments on each of these accounts, which are tax-deferred, taxable, and tax-free.

Taxable retirement accounts

Taxable accounts are accessible to anyone with a Social Security Number or SSN. Setting up a taxable account is comparable to starting a cash savings account. You fill out some forms, and you’re good to go.

You incur taxes on dividends, interest, and realized capital gains in typical taxable accounts. The company managing your account sends you annual tax statements summarizing your taxable transactions.

Tax-deferred retirement accounts

Tax-deferred accounts postpone your annual tax liability on dividends, interest, and realized capital gains. Such accounts enable their owners to contribute pre-tax funds.

With these accounts, investments can grow and compound undeterred by tax burdens until you reach your senior years. Your withdrawals will be taxed just like ordinary income upon taking qualified retirement distributions.

A tax-deferred account is subject to withdrawal restrictions and other requirements. In a 401(k) or IRA, expect a 10 percent penalty if you withdraw pre-tax contributions before the age of 59.5.

Tax-free retirement accounts

Roth funds and Roth IRAs within a 403(b) or 401(k) account are allowed to earn tax-free interest, realized capital gains, and dividends under specific conditions, which are:

  • Waiting to take withdrawals until age 59.5
  • Contributing after-tax money to your Roth account
  • 5 years or more since the first contribution of funds to the Roth account

With these rules, investment can be earned unimpeded without tax implications. Moreover, your qualified withdrawals in the retirement period are tax-free.

If you want other ways to achieve tax-free investment growth, consider an HSA. An HSA is oriented towards personal healthcare expenses, but you can also use it to fund your healthcare during retirement.

An HSA is the only type of account that allows tax-free withdrawals and will accept pre-tax contributions. The money you withdraw must be spent on qualified healthcare expenditures to take advantage of the tax-free withdrawals and income.

Decide on a withdrawal strategy

A retirement portfolio must have a funds withdrawal strategy. The strategy must abide by recommended time frames, such as drawing down 4 percent of your retirement account annually.

To illustrate this further, a $1 million nest egg that follows the 4 percent rule allows $40,000 to be spent on the first year. In the second year, the amount is adjusted based on the inflation rate. Approaching the third year, you take the previous year’s permitted withdrawal and adjust the amount for inflation.

Manage risk strategically

No investment is risk-free. Thus, it is crucial to learn how to manage risk to reduce potential losses. Risk management is also critical to building generational wealth and passing on assets.

Fixed-income securities allow investors to recoup capital during the investment’s life and can be a sound option for retirees. Some fixed-income securities offer periodic payments and benefits like lowering investor risk.

Some risk-specific insurance products might prove attractive to investors who want to build further protection against specific exposures that don’t fall under traditional insurance policies.

Actively de-risk your investments

In the context of retirement, de-risking deserves discussion. De-risking is the mitigation or reduction of the risks associated with investment portfolios. De-risking acts as a safety net. You minimize your potential losses as you aim to keep or enhance your returns.

In today’s economic environment, de-risking is an especially valuable approach that protects against stock market volatility and sudden downturns.

The Value of De-Risking a Retirement Portfolio

De-risking is extremely valuable in investments as it protects from the unpredictability of markets. It helps preserve your hard-earned money and makes it last through retirement, as it helps balance your pursuit of growth and high returns with capital preservation. The following are the benefits of de-risking:

Risk mitigation

When thinking long-term, de-risking is always a consideration. It’s an indispensable element in protecting against potential financial disasters.

When you retire, you must be actively looking for risk. Correctly identify, assess, and address them as they come along. With this mentality, you reduce exposure to adverse conditions in the market. Thus, risk mitigation should be factored into the overall retirement strategy.

Balanced pursuit

While high returns are essential to replenish your portfolio over time, it is also imperative to safeguard your investment. A balanced approach to both characterizes a strong portfolio. High-risk investments promise substantial rewards and can offer attractive gains over time.

However, de-risking helps you navigate the turbulence of the markets and prevents unnecessary exposure to extremes of volatility.

Sustainability

When you de-risk your portfolio, you strengthen its long-term potential. This approach gives you reassurance and confidence, as it bolsters the chances of having consistent and sustainable growth over time.

Wealth preservation

You must ensure that your hard-earned money status is intact and retains its value over decades. Capital preservation is what makes a solid financial foundation. It protects your financial health in favorable and demanding climates.

Investor resilience

De-risking imparts resilience to a portfolio. When your portfolio is sufficiently de-risked, it can better withstand economic shocks and market fluctuations. The reassurance and confidence from de-risking lead to better decision-making, even in the most volatile times. Creating emotional resilience is as important as building financial resilience because it leads to more rational investment approaches and decisions.

Insurance against uncertainty

De-risking can act as a financial insurance policy—a layer of protection on your investments that stabilizes them against shifts in the global economic landscape. You can benefit the most from this protection during downturns or worse events like recessions. In such cases, stability and security are favored over risk-taking.

Consider alternative investments as you diversify

Some well-known financial advisors do not believe in the need for alternative investments to secure a resilient portfolio. However, retirement planners should note that there are other ways to go than the traditional 60/40 public stock and fixed income allocation.

There are different ways to achieve a more balanced mix of assets, such as the 50/30/20 and 60/20/20 methods of splitting assets. Such strategies incorporate alternative assets, and many help build a portfolio’s resilience by making it less sensitive to short-term swings in the markets.

Alternatives include venture capital, private equity, digital assets, precious metals, collectibles, and real estate. They are less connected to public equity, highlighting their diversification potential. Alternatives, however, carry risk just like any investment. In some cases, the risk of investing in such assets can exceed that of traditional investments. Nonetheless, they may be suitable for those who can invest more money. They often require high minimums, ranging from $500,000 to $1 million.

Be Meticulous and Proactive About Managing Your Portfolio

Achieving one’s ideal retirement portfolio—designed to support your needs and withstand economic ups and downs for the long haul—does not happen by accident. It takes careful planning, preparation, and consultation with astute financial planners to create an investment strategy that suits your time horizon, risk tolerance, and financial goals.

A resilient portfolio is well-diversified, allowing it to withstand future challenges. However, diversification is not the only consideration when building a retirement portfolio. Built for several decades, it must also have a solid risk mitigation strategy.

One of the most important things about achieving financial resilience is active portfolio management, ideally with the help of a financial advisor or wealth manager. As economic trends are not static, investment strategies must provide room for flexibility and adaptability.

Today’s digital tools help you adjust quickly to unfavorable economic climates by providing convenient ways to buy, sell, or reallocate investments. While your long-term goals may remain the same, the ways to achieve them may need adjustments along the way.

Featured Image Credit: Photo by Craig Adderley; Pexels

The post How To Build Financial Resilience for a Long Retirement appeared first on Due.

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