Investing for retirement can be nerve-racking especially when the news cycle seems fixated on amplifying market turmoil. As an investor, you may be concerned when the onus is increasingly on you the individual investor to plan for retirement.
Increased Market Uncertainty
From President Biden’s announcement that he will not be seeking re-election, to a rotation out of tech stocks and into small caps, recent events have added to market uncertainty.
The S&P 500 recently declined 2.9% from its all-time high, while the Nasdaq pulled back nearly 5%. It’s natural for investors to be concerned about where the market is headed, especially as the presidential election season heats up and the Fed prepares for its first-rate cut this cycle.
Stay Focused on the Long Term When Investing
However, history shows that it’s important for investors to stay focused in the long run and not overreact to every news headline. More than ever, staying levelheaded is the best way to achieve long-term financial goals.
As the charts below indicate, it is the investor, working with their investment and tax professionals, who must be proactive. Investors need to understand the risk-reward trade-offs and be realistic about their goals and strategies. Having big returns with little risk is not realistic.
Developing a plan that focuses on future cash flow needs, current investment management and risk management is realistic. Investors should seek a portfolio that meets their needs, goals, and risk tolerance.
>> See Risk and Return When Investing in the Market
This is where Pendragon can help. Additionally, at Pendragon, we are mindful of taxes. What types of investments in which types of accounts can make a difference in the returns you keep.
>> See The Implications of Tax Changes: Start Early!
Investors are Increasingly Responsible for their Own Retirements
This is especially true when it comes to saving for retirement.
- For those with decades until retirement, it’s critical to start early and hold the right mix of assets that can generate sufficient growth.
- For those in or near retirement, sticking to an asset allocation that supports income needs while providing growth for longer retirement periods has never been more important.
In both cases, investors today need an understanding of the retirement landscape and why they may need to take action to grow and protect their retirement savings.
Over the past 50 years, the burden of planning for retirement has shifted from corporations and the government to individuals. Understanding the labyrinth of investment vehicles, tax consequences, how to construct an appropriate portfolio, as well as what to do in times of market volatility can be challenging for even the most sophisticated investors. This is one reason to always seek professional advice so you can ensure that you’re on track to achieve your financial goals.
>> See How Financial Planning Helps You Navigate Lifestages
Most companies also use financial advisors to set up and manage their employer-sponsored retirement plans.
How Has the Retirement Landscape Shifted?
Looking back, the American Express Company (a railroad business at the time) introduced the first pension plan in 1875. This kicked off a trend of employers providing benefits for employees in retirement.
For much of the next century, these were largely “defined benefit” plans, meaning employers contributed to a shared fund and eligible employees would receive benefits in a set amount once they became eligible. Defined benefit plan participants would have the assurance that if they met the qualifications, they could count on regular paychecks in retirement.
Of course, when most people think of receiving checks in retirement, government programs such as Social Security come to mind. Social Security was introduced in 1935 when the Great Depression caused unemployment to soar to over 25%. It began providing income to workers once they turned 65 and was responsible for mainstreaming the idea of a retirement age and providing a safety net for older Americans.
However, it’s widely known that shifting demographics and longer life expectancies have put the future of the program in jeopardy. According to the latest report by the Trustees of the Social Security and Medicare trust funds, Social Security reserves are expected to be depleted in 2035 unless Congress acts, at which point fund income will be sufficient to cover only 83% of scheduled benefits.
It’s been the case for decades that individuals cannot simply rely on Social Security for their retirement needs.
>> See How Much Money Do You Need to Retire?
Investors Must Determine the Most Appropriate Asset Allocation for Their Goals
Today, the investing journeys for most individuals begin with their company’s defined contribution plans, such as a 401(k) or 403(b).
The key difference is that defined contribution plan participants must select and manage investments themselves. As a result, they receive benefits in retirement from only what they have saved and invested, unlike under a traditional defined benefit pension plan.
The same is true for other retirement vehicles that individuals can open on their own, such as IRAs.
The Key Principles of Investing
Given this broad shift over the past halfcentury, the burden of investing properly now falls squarely on the shoulders of individuals. For this reason, all individuals need to understand the key principles of
investing, especially since they are not typically taught in school.
Hold a Properly Constructed Portfolio Tailored to Your Needs
First, investors should hold a properly constructed portfolio tailored to their specific needs, including their life stage, risk tolerance, and more. In the short run, choosing the right mix of assets can help investors weather the inevitable market swings that occur quite often, such as during market pullbacks that have occurred throughout this year.
For example, stocks tend to generate larger returns but are also much riskier, as shown in the chart above. In contrast, bonds are typically more stable but also have less potential upside. An appropriate asset allocation allows investors to take advantage of the positive attributes of both asset classes to create a portfolio that is more than the sum of its parts. Investors can then adjust this asset allocation throughout the various stages of their lives and as they approach retirement, in addition to making tactical and strategic shifts based on market conditions.
Save Early and Stay Invested: Critical for Retirement
Second, saving early can help investors build wealth due to the power of compounding.
The earlier an individual begins investing, the more time their money has to grow before withdrawals are needed. This is true even during periods of market turbulence such as over the past few years.
While staying out of the market or keeping cash in a checking account may feel safe, the true opportunity cost is the forgone gains that could have helped to provide a more secure retirement.
Focus on the Long Run and Not Day-to-Day Market Fluctuations
Finally, it’s important to always stay focused on the long run rather than worrying about day-to-day market fluctuations. Investing early and staying invested through the ups and downs of market cycles are the best ways to achieve financial goals. Trying to time the market or make sudden changes to a portfolio is not only difficult but can be counterproductive since it derails investors from their true objectives.
>> See Why Staying Invested Is So Important For the Long Run
It can often feel as if there is always another crisis on the horizon whether due to politics, the Fed, interest rates, or tech stocks. However, while there are no guarantees when it comes to investing, history shows that investors who save steadily and follow these key principles will be in a better position to grow their retirement savings.
The Bottom Line About How to Invest for Retirement Amid Market Uncertainty?
Today’s retirement landscape requires individuals to take responsibility for their own financial planning. While it’s challenging, it also creates opportunities for investors to tailor their retirement plans to their specific needs.
If you aren’t yet invested and/or haven’t yet considered planning for retirement, we encourage you to get started.
Let’s have a conversation. Pendragon Capital Management has software tools to put numbers and ideas to paper, run scenarios, and develop a retirement plan. These tools combined with Pendragon’s experience, will take the stress out of planning.
Thanks for reading. Don’t hesitate to reach out with questions.
>> Schedule a Free Consultation with Pendragon Capital Management <<
Image credit: Retired Emperor Sanjô, Ogura Imitation of the One Hundred Poems (series title), The hundred poets compared: a print series by Kuniyoshi, Hiroshige, and Kunisada, Henk J. Herwig, Joshua S. Mostow, p. 170, cat.nr. 68, Rijksmuseum
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