Retirement planning

Retirement investors should accept unpredictability as their new normal, according to an expert

The Natixis Center for Investor Insight, whose executive director is Dave Goodsell, conducts research on topics and trends that are significant to investors, their financial advisors, money managers, employers, governments, and politicians.

2020 seemed to be the year that would never end due to the coronavirus epidemic, a protracted presidential election season, and the fastest market correction in history. Thankfully, there is cause for optimism for a return to normal in 2021 with the official election results in November and a number of new vaccines in December.

Even though starting a new year may have never felt better, uncertainty still exists. Vaccines are available, yet the pandemic persists. Despite having a new government, polarization persists. We have reached new market highs, but we are unsure of how long the bulls can continue. Though things may look better now, uncertainty still exists. And that might put retirement savers in a precarious situation.

The majority of the difficulties that retirees face when saving for their future are well-known: low savings rates, restricted access to good retirement plans, inadequate investing advice, student debt for younger workers, and other issues that make it more difficult for people to save for their future even as private pensions and Social Security become less of a source of security.

Financially constrained workers decreased savings and withdrew from retirement plans as job losses increased during the epidemic, and companies lowered or stopped matching contributions to 401(k) plans. It is more difficult for pension managers and pensioners to make a living when interest rates are decreased to encourage economies. Additionally, increased governmental debt brought on by deficit spending to lessen the effects of the epidemic may prevent further investment in the requirements of retirees.

How does everything work out for workers who are preparing for retirement? Simple: Be prepared for the unexpected and keep in mind that preparation must be adaptable. Reduce preconceived notions and rely more on factual observation. And put yourself in the greatest possible position to profit from future trends or conditions beyond what we currently understand, or at the very least be hurt as little as possible. Here are six actions that employees may take to get ready for retirement, even though they have no idea how the world will look in a year, much less when they actually retire:

Funding retirement plans in full

Utilize the various saving options that are accessible, such as auto-enrollment and auto-escalation, to guarantee that contributions are made immediately upon employment and rise over time. It is straightforward: The more you save, the more you will be able to withstand volatility over time, accept inevitable losses, and be in a better position to realize rewards. Those without access to a defined contribution plan have the tax-advantaged option of using individual retirement accounts.

Embrace free money

Investors should take full advantage of any employer match offered through their retirement plan: It reflects an annual return after taxes and is therefore literally free money. Investors are aware of this: According to a Natixis poll, 56% of respondents say they participate in their employer’s retirement plan because of the match, and 57% say they would save even more if the match were increased.

Simple is best.

Making investment decisions is difficult, and it gets even harder if extra complexity is included. Investors should adopt a diversified strategy that incorporates a variety of asset classes and strategies, including growth and value, equities and fixed income, as well as other assets that are in line with the aims of the investor and can increase risk-adjusted portfolio returns. Long-term investors who disregard the fundamental investment principle of diversification do so at their own peril.

Thou shalt be truthful to thyself.

According to Natixis study, investors, particularly those in younger generations, are more passionate about investments that are consistent with their own morals and beliefs. Investors are encouraged to increase their holdings and, of course, their retirement savings by engaging in responsible investment, such as that with an environmental, social, and governance (ESG) focus. Furthermore, ESG strategies often have shown to be very defensive, with less risk than regular funds, during times of choppy markets.

For instance, sustainable funds fared the period of high market volatility in the first half of 2020 better than portfolios without a focus on ESG concerns. Investors should ask about ESG solutions if their retirement plans do not include them.

Seek wise counsel

For every successful day trader, there are 100 self-directed investors who follow the markets. Investment experts can offer advice on specific decisions as well as self-awareness and perspective that are difficult to develop on one’s own.

One Natixis study, for instance, indicated that experts are more likely than investors to detect blind spots, leading to the conclusion that investors are more concerned with short-term gains and are unaware of the hazards associated with the current markets. According to a different survey, employees who have access to financial advisors put in a higher percentage of their pay—7.2% for advised participants versus 6.5% for non-advised—to 401(k) plans.

Hope for the best, but be ready for the worst

Workers would be well to make plans for increased self-sufficiency given the uncertainties around when interest rates and investment returns would increase once more. This could entail planning to make savings last for potentially longer lifespans, changing careers rather than quitting your job, planning to live on less money in retirement, and adopting a more frugal lifestyle. In such a scenario, they will need to choose investments that will benefit them.

Each of these actions is a sensible method to reduce the uncertainty of the upcoming months and years as well as to control the risk and volatility that go along with it. We can’t know the unknown, but we can take efforts to be ready for any anticipated scenario while remaining adaptable enough to change with reality, so preparing for uncertainty involves embracing ambiguity.

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