How to steer your retirement portfolio through the storm

Here’s what you already know: the world is a pretty crazy place right now. From high inflation and rising interest rates to major market volatility, today’s economic uncertainty is beyond anything we’ve seen since – and possibly even before – the 2008 financial crisis.

But aside from the immediate impact on the cost of living, what does all this mean for your retirement plans? And more importantly, how can you protect your precious nest egg from the worst of it?

Stress test your portfolio

The best place to start is to use financial planning software to figure out what a period of little or no growth can mean for your retirement savings. Ideally, this should be a bit more robust than the free software on the internet. Instead, you want enough bells and whistles so you can play around with different variables and really understand their potential consequences. (A qualified financial advisor can help you find the best software. I like eMoney Advisor.)

These variables should be things like:

  • What if we see inflation at 6% for a decade?
  • What if I lose 20% of my portfolio value in the next three years?
  • What if my annual return in retirement is 5% and not 7%?

By stress testing your portfolio against these scenarios, you can find out if there’s a gap between your projected income and the income needed to fund your planned retirement — and if so, how big that gap is. Knowing this will help you decide what action to take to close it.

Maximize your savings

Which brings us to the second step: Use all possible savings vehicles. For example, while most people participate in a 401(k), far fewer are familiar with a cash settlement plan. This is a type of tax-deferred defined benefit that allows you to invest a certain percentage of your income each year alongside what you put into your 401(k).

So adding one to your portfolio is a great way to build your retirement pot. In fact, if you’re in your early 50s, a cash balance plan can mean the difference between saving $67,500 a year with a 401(k) and profit sharing and saving $258,500 – all on a tax-deductible basis (this would be a cash balance plan that is above a 401(k) with profits). Accumulated over a decade or more, that’s a very healthy addition to your retirement savings!

Share your nest egg

There are two types of expenses that ultimately determine your retirement lifestyle: fixed and variable. Fixed costs are unavoidable expenses that you incur year after year that you have little or no control over when you pay them. Things like your mortgage, utilities, property taxes, even your kids’ college tuition.

Because these expenses are typically non-negotiable, you should set aside a specific portion of your retirement portfolio to cover them — this is where more predictable income investments like municipal and government bonds, structured notes, and annuities come in. These offer a stable interest rate or guaranteed income on annuities so that these can be linked directly to your fixed expenses. However, resist the temptation to overcorrect by investing your entire fund in fixed income vehicles. Otherwise, you risk getting to a point where inflation exceeds your rate of expansion, leaving you worse off.

Variable expenses, on the other hand, are lifestyle expenses over which you have some control, such as B. Holidays, entertainment and travel. These should be funded through a separate part of your portfolio to avoid consuming the money you need for your fixed expenses, usually by selling stocks or drawing on your retirement savings when the time is right without (hopefully!) at a loss for sale or incur significant fees.

Note, by the way, that some costs may be included in both blocks of expenses. For example, your medical premiums are fixed expenses, but any expenses you or a family member incur due to illness or injury should ideally be covered as variable expenses.

Be prepared for anything

Regardless of the stage of your career you’re in, it’s perfectly understandable to worry about how such economic uncertainty might affect your ability to lead the lifestyle you want after you’ve finished work. But the worst thing you can do is bury your head in the sand and hope for the best.

Sure, none of us can control how long this current storm will last, or accurately predict when the next one might come. But by monitoring your returns versus expected expenses, making full use of all savings tools, and finding the right balance between fixed income and variable income investments, you’re giving yourself the best possible chance of getting through with your portfolio and retirement plans intact.

Director of Diversity & Inclusion, Executive VP, Equitable Advisors

Stephen Dunbar, Executive VP of Equitable, has built a thriving financial services practice empowering others to make informed decisions and take responsibility for their future. He and his team advise on $3B in AUM and $1.5B in protection coverage. As National Director of DEI for Equitable, Stephen acts as a change agent for the organization and creates a culture of diversity and inclusion. He earned a BS in Finance from Rutgers and a JD from Stanford.

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