For all the aspects of life that COVID-19 has upturned, its impact on individuals’ retirement plans has been predominantly minimal for most of the pandemic.
Even with all the business owners who closed their doors forever, the employees blindsided by layoffs, families who dipped into their savings and countless other stories of how households’ finances were blown apart, advisors and wealth managers didn’t really see their clients worry until inflation’s meteoric rise.
“The pandemic did not really affect retirement plans so much because, even though the market was very volatile when COVID first started, it ended within a couple of months,” says Gary Begnaud, executive vice president, financial advisor for Begnaud Wealth Management Group of Janney Montgomery Scott. “We actually had great returns for a year and a half after COVID started overall.
“Now, we have a problem with inflation, which we can say is a product of the pandemic from two years ago,” he continues. “It’s having such an effect on the stock market and bonds: Now we might be seeing people try to delay their retirement because they’ve seen such a drop in their assets this year. The markets have gotten hit, so now’s the time when people have to start maybe re-evaluating their time horizons [but] it’s still too soon to tell if what’s happening now is going to continue for a couple of years or if it will end in a few months.”
While it’s too early to tell if inflation’s effects are a lasting trend requiring reassessment or an anomalous blip that will normalize against the bigger picture, any time an individual has to consider an adjustment to their established retirement strategy necessitates a hard look at their goals and serious conversation with their advisor.
“If they want to stay with their original plan, are they willing to spend less during their retirement, how would that adjustment bear over a 30- to 40-year retirement?” adds Gary’s daughter Amy Begnaud, Begnaud Wealth Management Group’s vice president/wealth management, financial advisor. “For our clients, we’re making adjustments looking at it as, if this is to continue for two-plus years, what effect would that have on their financial plan if they’re close to retirement now, if they’re getting ready to retire now, if they’re already retired and they’re living off a certain amount of fixed income off of their investments?”
There has never been one surefire or safest way to approach retirement planning, even in comparatively steadier times, as people always have different financial positions, retirement target dates or appetites for risks.
“Each investor must first assess his or her risk tolerance,” notes Dr. David Pederson, an associate professor of finance at Rutgers School of Business-Camden. “It is difficult to identify a ‘safe bet’ because investors will differ on what they mean by ‘safe.’ Putting all your money in a savings account will remove worries about volatility, but it will also eliminate the opportunity for growth. Investing in a market-based index fund has shown the ability to generate long-term growth while subjecting the investor to the ups and downs of the market.”
In general, though, a volatile market—such as the one we’re living in now, with the war in Ukraine adding even more question marks to the equation—underscores the importance of a portfolio that doesn’t put all its eggs in one basket while also making investments with an eye on international affairs.
“Diversification is cliché but true: We don’t recommend putting all your assets in one stock or putting all your investments in one industry or sector,” says John Fessler of Claritas Financial Partners. “Right now, there is volatility in the energy market, as it could be real estate or finance [next] as business cycles change. Also, think about your exposure to a company that generates revenue in other countries.”
Ted Rich, a member of the National Association of Insurance & Financial Advisors, agrees, pointing out that there is another notable constant in retirement planning: “Retirees are looking for guarantees, not ‘what if.’”
He adds that “it’s not a particular investment that will help clients reach their goals, it is understanding which strategies are needed to have a successful retirement.” Those three methods, used alone or in any combination together, are: utilizing a structured, systematic withdrawal; the “bucket approach,” an age- and time-based segmentation approach; and the “essential-versus-discretionary approach,” also known as “flooring” or “safety-first” retirement planning.
“A combination of these approaches can create a plan designed by a professional retirement planner that understands a client’s needs of how these existing investments will work together to meet their goal,” explains Rich.
And while it’s a financial expert’s job to help their clients get to that goal, investors do have to identify both their finish line and their capacity for absorbing risk.
“Investors should focus on their goals and the things they can control,” Pederson says. “Investors can self-reflect and understand their own tolerance for risk. What types of risks will keep them up at night? What types of investments are aligned with their risk tolerance to help them reach their financial goals?”
Regardless of the approach one takes, one of the most important assurances investors need is that they won’t deplete their savings. It’s an increasingly common concern as longer lifespans mean looking at decades of retirement to account for, as well as the health issues, rises in costs of living, emergency home repairs and other unknown, unpredictable expenses their savings will have to absorb.
“The No. 1 fear for retirees becomes ‘Will I outlive my money?’” Rich says. “You should be working with an advisor that understands all phases of retirement, which could possibly be 30 years or more.”
“Life’s not just smooth sailing, as we’re seeing right now,” Amy Begnaud adds. “If a client is taking every last penny of income that’s being produced off their portfolio, and we’re not able to grow, create some buffer of money, that’s not thinking ahead—and what we’re doing as financial advisors is always looking ahead.”
Retirement itself is a thing best approached in two phases: In most cases, one’s 20s and 30s are guided by accumulation’s more aggressive approach; the second phase, decumulation, reflects the more conservative approach wealth managers and other financial experts tend to take as individuals grow nearer to their target retirement dates.
Both phases have their danger zones and pitfalls, which are exacerbated by times of economic troubles or market downturns. Having an objective, measured perspective providing context to those uncertainties can both offer reassurance and stay your hand when it’s tempting to overreact out of alarm.
“The past two years have been an emotional time for clients: It’s a time when having an advisor showed its value in putting people at ease in uncertain times,” observes Fessler. “Humans and also the markets are uncertain. When fear of the unknown is highest, that’s what we’re able to come back to the client and say, ‘This is the plan, we have multiple strategies working for you so if one is not doing what we intended, we have multiple lines.’”
Managing investors’ emotions has always been a significant component in retirement planning, which is why trust between both parties needs to be a two-way street.
“It’s not just about the numbers: It is very much a matter of trust that works both ways,” Rich emphasizes. “We need to be working with people who want to be proactive about their financial planning, and they need to know it’s OK to speak up when they’re not sure about something so we can stop right there and talk about how an approach fits into their retirement planning.”
That trust helps ensure a client and their advisor are on the same page in creating the plan best suited to an investor’s needs while being flexible enough to adapt to both macroeconomic and individual changes along the way.
“Having a financial plan in place is actually a road map, as opposed to just buying some investments and then crossing your fingers and hoping for the best,” says Amy Begnaud. “That plan is a living document where we make ongoing adjustments.”
-Liz Hunter contributed additional reporting to this article.
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