“Some of the market’s best days occur very close to the worst days.”
This is one of the pieces of advice from the 2023 Retirement Guide published recently by J.P. Morgan Asset Management . The guide is the 11th version of this report, which each year takes a look at the state of the market for both future and current retirees. It shares some insights and advice for how to structure your retirement plan in the year ahead, and has a few key takeaways for investors. Below, we’ll unpack the most important themes.
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Some of the most important themes include:
Maximize What You Can Control
Most importantly, plan for what you can and can’t control.
The 2023 guide opens with what the firm calls its “retirement equation.” These are the six factors that contribute to a strong and successful retirement portfolio. They are:
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Saving vs. spending priorities
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Duration and earnings of employment
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Lifespan
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Market returns
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Economic policy at large
As JPMorgan explains, investors have varying degrees of control over these factors. You have a lot of control over how you set your spending and saving priorities, as well as what investment assets you choose. You have partial control over your employment and longevity; for example, you can choose what jobs you apply for but careers and layoffs have a mind of their own. You have effectively no control over market returns or economic policy at large.
This is, the guide suggests, important to understand for two reasons. First, make the most of the factors that you can control. Set your saving and spending priorities well, and try to invest wisely. Second, plan for the factors that you cannot. Don’t depend on strong market returns, that’s out of your control. Instead, build a portfolio to manage risk. Make good choices for your health and don’t plan a budget around dying early. That’s partially in your hands, so do the best you can with the elements you can manage.
Invest For The Long Term, Not The Current Market
Inflation and a fluctuating market dominated the financial news for pretty much all of 2022. There’s good reason for this, of course. The stock market posted significant losses over the course of the year, while at points inflation reached its highest levels since the early 1980’s.
But, JP Morgan advises, that’s no reason to bail on your retirement strategy… or even significantly change it. Instead, investors should remain focused on long-term goals and outcomes. Most importantly, don’t sell your assets or bail on a good strategy just because of temporary conditions.
“During periods of extreme market declines, a natural emotional reaction can be to ‘take control’ by seeking safety in cash,” they write. “The results of this action can be devastating because during periods of market volatility, the best days are likely to occur close to the worst days.”
An investor who sells his investments during a downturn is likely to miss the strong rebounds that volatility cycles can bring. Timing the market is nearly impossible. As JPMorgan’s guide notes, over the past 20 years investors who missed the market’s best 10 days cut their annual returns by half. Investors who missed the best 40 days actually posted negative returns on their initial investments.
This is not to say that you shouldn’t sell your investments in a changing market. The point is just to keep invested with a long-term perspective. Make a good strategy, stick with it and let volatile cycles work themselves through.
Don’t Plan For Additional Income
“A very high percentage of those who are currently working expect to work to age 65 or later,” reports JPMorgan, “but the actual experience of retirees is quite different.”
According to an AARP survey 57% of working adults plan to keep working after retirement for financial reasons. The problem is that, according to JP Morgan, this plan might not work. Nearly a third of retirees said that they couldn’t even finish out their career as planned, often due to health issues or disability.
Earning income in retirement may not be an option, no matter how healthy you feel during your working life. For investors who build this into their retirement plan, this can create a serious financial gap when they’re least able to adapt.
“It is very important,” writes JP Morgan, “that clients have a financial backup plan if they are not able to work.”
Diversify Your Accounts’ Tax Status
“Different tax-advantaged savings accounts have different tax characteristics,” JP Morgan writes. Individuals should make sure to consider this not as a complication, but a potential advantage.
Consider investing in a variety of different retirement accounts. Pre-tax accounts, like a 401(k), have a completely different tax footprint from post-tax accounts like a Roth IRA. The 401(k) can give you more money for an initial investment, while the Roth IRA lets you take money out tax-free. And both are different from the opportunities involved with a traditional portfolio, which will typically be taxed at the lower capital gains rates, and health savings accounts, which young people with high-deductible insurance plans can make the most of.
The result is that different accounts have different advantages and disadvantages. There’s no one-size-fits-all. Instead, consider building a range of different accounts with different profiles. This will help you maximize your tax advantages both over time and in retirement.
Take Advantage Of Expanded Opportunities
SECURE 2.0 will change the retirement marketplace significantly.
An Employee Benefit Research Institute study found that having access to an employer-sponsored retirement plan makes people twice as likely to save for retirement. For people who work at a large company this tends to correlate with strong retirement savings, since almost every large company offers some form of retirement plan. By contrast, only about half of companies with less than 50 employees do so.
The new law aims to change that. SECURE 2.0 offers a series of tax credits targeted at small businesses, all designed at increasing the number of employer-sponsored retirement plans in this market.
Investors should anticipate this. The contribution limits on a 401(k) are significantly higher than for an IRA, so small business employees may soon have the chance to save far more for retirement. It will also make retirement saving mechanically easier for these workers, since they no longer will have to manage their own portfolios.
Beyond this, both existing and newly created 401(k) plans can take advantage of matching student loan contributions. Employers can now make matching contributions to a qualifying retirement plan based on their employees’ student loan payments. This will help build retirement savings for young workers who currently may put off opening a portfolio in favor of paying off their debts.
Bottom Line
JPMorgan recently released its 2023 Retirement Guide. It has advice for how investors can take advantage of new laws and opportunities, but largely recommends that investors avoid planning for the current market.
Retirement Planning Tips
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