With what has been happening in the markets and the world recently, you may have asked yourself, “Should I be concerned?” or “How should I be thinking about my money right now?” And that’s not a bad thing. Creating a sound financial plan for retirement requires imagining what could go wrong. And those fears are not necessarily unfounded—96% of Americans will experience four or more major “income shocks” by the time they turn 70, according to Billy Hensley, president and CEO of the National Endowment for Financial Education (NEFE).
Inflation, interest rates, federal monetary policy and geopolitical events all affect the market and how other investors react to it. These recent events have forced us to pause, reflect on our financial goals and consider how we want to live day-to-day life as we eye a fulfilling retirement.
The bottom line: it’s about ongoing planning, not a single, or static, plan. The act of sitting down with your family or financial professional and asking important questions can prepare you for the next chapter of your life. And the two key considerations that will help you plan for that next chapter? Resilience and flexibility in the face of uncertainty. With those considerations in mind, here’s what individuals can do to stay confident amid the biggest challenges affecting financial planning today.
Inflation
Eric Winograd, AllianceBernstein’s senior vice president and director of developed market economic research, has the following thoughts on inflation.
“It is true that the dominant driver of the inflation spike remains goods prices, which are elevated largely because of COVID-related disruptions. Durable goods prices are up almost 20 percent year-over-year, and non-durable goods prices roughly 13 percent year-over-year.
That is a very dramatic change from the pre-COVID environment in which goods prices made essentially no contribution to inflation for roughly two decades. But over the past few months, services inflation has risen too—that means that inflationary pressures are likely to be with us for longer and to be harder to bring back under control. The Fed has already started that process by raising rates last month, and we expect more hikes in the coming months. Over time that will slow demand and contribute to inflation coming back down, but it is going to take time.
To sum it all up: The Fed has pivoted fast and hard, and the next few months are going to be a steady march toward tighter monetary policy unless inflation woes resolve swiftly. In that case, the march will be more of a sprint, and individuals will need to look to different types of investment solutions to achieve their goals in this environment.”
Structural Shifts
Clicking on the current picture and zooming out even further, we must address how structural shifts are changing behaviors.
Folks currently lack the security of a defined benefit plan, underscoring the need for guaranteed income strategies, increased participant education and smart plan design that mirrors the safety of defined benefit plans.
In a workplace retirement plan, this can take the form of including auto-enrollment for new employees, auto-escalation of contributions annually (or with pay increases), and, with the introduction of the SECURE Act and the movement of SECURE 2.0 in Congress, the addition of in-plan guaranteed lifetime income strategies. These would help ensure people are actively saving and investing for their retirement and that they are guaranteed at least some income when they get there.