2023 Retirement Themes

Typically, the content in our monthly thought leadership package is reserved for original, in house written material from members of our team. There are, however, moments of exception when we come across a piece that is just so good that we feel is worthy and worthwhile to include in this client communication.

Recently, JPMorgan released their annual Guide to Retirement report. This is a piece, similar to their Guide to Markets, that we find very useful each year. This week I reviewed the 52 page report and have summarized it with their 4 major themes for 2023.

The first of these retirement planning themes is to focus on factors that you can control and to understand those that you cannot. The 2023 JP Morgan retirement guide starts with what they refer to as the "retirement equation," which identifies six key factors that contribute to building a robust and successful retirement plan. These factors include: determining priorities between saving and spending, asset allocation and investment strategies, length and income from employment, lifespan, market returns, and the impact of economic policies. Obviously, some of these are in your direct control while others are completely out of your control.

During client meetings, I find myself drawing a Venn diagram on a piece of paper when discussing retirement planning. I identify the left circle as containing “what you can control”, the right circle as “what you can’t control” and the intersection in the middle as the sweet spot of retirement planning. This is exactly their point.

Investors have varying levels of influence over the six factors that contribute to a successful retirement plan. You can control how you prioritize spending and saving, as well as the investments / risk objective you choose. However, you have limited control over the duration and earnings of your employment, as well as your lifespan, while you have no control over market returns or economic policies.

Understanding these factors is crucial for two reasons. First, you should focus most on the factors you can control. This means setting sound saving and spending priorities and making wise investment decisions with your advisor. Second, it's essential to plan for the factors that you cannot control. You should not rely on favorable market returns, which are out of your control. Instead, build a portfolio that can manage risk and returns over time. You should not plan a budget around the assumption of an early death, but rather manage the factors you can control to the best of your ability. This is exactly why we stress the importance of having an up to date lifetime income model - if you feel you have new elements to discuss with your advisor and how they impact your model, please reach out.

The second main theme of the report is invest for the long term, not the current market. Throughout 2022, financial news was dominated by stories of inflation and fluctuating markets. The stock market experienced significant losses, and inflation rates reached some of the highest levels seen since the 1980s.

Despite these conditions, it is crucial not to abandon investment strategies or make significant changes. Instead, it's essential to remain focused on long-term goals and outcomes. Most importantly, resist the urge to sell assets or change a good strategy just because of temporary conditions.

During market declines, investors may feel compelled to seek safety in cash, to “do something!” However, this can be detrimental because the best days of the market often follow the worst days. Investors who sell their investments during a downturn are likely to miss out on the strong rebounds that market volatility can bring. Timing the market is nearly impossible, and missing the market's best days can significantly impact long-term returns.

JP Morgan's guide notes that investors who missed only the market's ten best days over the past two decades saw their annual returns cut in half. Investors who missed the top 40 days actually posted negative returns on their initial investments.

The third theme of the report is don’t plan for additional income. JPMorgan reports that a significant percentage of people who are currently employed anticipate working until age 65 or beyond. However, the actual experience of retirees often differs from this expectation.

According to a survey conducted by AARP, 57% of working adults plan to continue working after retirement due to financial reasons. However, as JP Morgan notes, this plan may not work out as intended. Almost one-third of retirees stated that they could not continue working until retirement age, often due to health problems or disability.

Even if you feel healthy during your working life, earning income in retirement may not be feasible. For investors who include income from work in their retirement plans, this can result in a significant financial shortfall when they are least equipped to adapt.

JP Morgan emphasizes the importance of having a financial contingency plan in case you are unable to work. It is crucial to have a backup plan to ensure that you can maintain financial stability throughout your retirement years. This is why in all of our lifetime income models we include a variety of “what if” scenarios.

The fourth and final theme of the report is to diversify the tax status of your accounts. Our clients may have heard us refer to this as “having different buckets of money.” We see this with clients where they get to retirement and 90% of their financial assets are in a traditional 401k. While this has been their primary accumulation tool, it also means that accessing their funds forces taxable income onto them. It is important to have different tax-advantaged savings accounts which have distinct tax characteristics. Rather than viewing this as a complication, individuals should consider it a potential advantage. I recently wrote about the role ROTH IRA’s can have in the retirement equation.

Investing in various retirement accounts can be beneficial. For instance, pre-tax accounts like a 401(k) have a different tax impact than post-tax accounts like a Roth IRA. While a 401(k) can provide more funds for an initial investment, a Roth IRA allows you to withdraw money tax-free. These accounts differ from traditional portfolios, which are usually taxed at lower capital gains rates, and health savings accounts, which can be advantageous for young people with high-deductible insurance plans. As a result, different accounts have unique advantages and disadvantages, and there is no one-size-fits-all solution. Instead, consider building a portfolio of various accounts with diverse characteristics. This strategy will help you maximize tax advantages over time and in retirement.

In summary, JPMorgan's annual Guide to Retirement report is a valuable resource that provides insights on retirement planning and saving. If anything in this article prompted thoughts on how your own retirement plan is going, please reach out to me or your respective advisor. If you are interested in receiving the full report, please email me james.chapman@ccpwealth.com.