10 ways to plan for retirement should we face another “lost decade”
A little ingenuity and creativity can provide you with a better future than might otherwise be anticipated if we truly end up in another lost decade.
Two months ago—hey, probably a month ago—nobody would have believed the current behavior of the stock market. Biggest one-day drop in history? Multi-thousand-point gyrations? Trading halted multiple times in a single week? Nah, never happen.
Until it did.
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And while, as a Kiplinger report points out, recessions and bear markets generally don’t last long, the old saw about “this time it’s different” certainly applied to the years between 2000 and 2009, when an investment of $1,000,000 in the S&P 500 would have ended up as $900,000, with a net loss—not a return—by the end of the decade: a “lost decade.”
The report offers this as context: National Bureau of Economic Research data indicate that from 1854 through 2009 there have been 33 business cycles, and during this period the average recession lasted approximately 18 months. There have been 32 bear markets—defined as a decline from market highs of at least 20 percent—since 1900. They hit, on average, “about once every 3.5 years and last an average of 367 days.”
But that’s not what this looks like.
And those who are preparing for retirement could be in particular jeopardy, according to a report in The Hill that points out that among older households, the exposure to stocks could be a substantial part of their retirement portfolios.
The report quotes Monique Morrissey, an economist at the Economic Policy Institute, which focuses on poverty reduction, saying, “Disproportionately, older households have more exposure to stock market fluctuations and less time to catch up.” It also cites a finding from Vanguard that in 2018, the median investor over 65 had about 40 percent of their portfolios in equities, with the average household in the 55–64 age range having $322,000 in equities.
But, Morrissey points out that such a figure is skewed, since half of households within that age not only have less than $5,200 in equities, but only about half of Americans even have a defined contribution retirement plan like a 401(k).
But with those equities heading south at such a pace, we could be in for another “lost” decade as the coronavirus takes its toll not just on the U.S. but on all the world’s economies. There are ways to plan for a period of time that will certainly take a bite out of retirement plans for plenty of people. Says the report, “While no one can accurately predict exactly what the future holds, it’s reasonable to assume that the U.S. market will have lower returns over the next 10 years than the unbelievable returns experienced over the past 10 years. This possibility is beyond anyone’s control.”
Still, there are ways to plan ahead and to exert control over the factors that will bend to the intentions of people still hoping to retire some day. Below are some suggestions from a range of sources for scenarios in which planning ahead could still make a difference and help to keep your plans on track.
10. Set aside as much cash as possible.
Liquid investments figure here, as does actual cash on hand. Trying to sell investments that could be tough to shed in a “lost decade,” not to mention the fact that they’d likely command a far smaller price than you paid/need for them, can booby-trap any retirement plan.
But having either savings accounts or money market funds on hand from which to draw expenses like mortgage payments, utility or medical bills, or even grocery bills can make a big difference.
It can be tough, as the Motley Fool points out, but if there’s a way you can set aside a little extra it will help to smooth the rocky road ahead.
9. Pay off debt.
It only makes sense that if you’re making easy monthly payments that suddenly aren’t so easy, you’re sending away money that you could otherwise learn to live on.
Paying off debt, as quickly and efficiently as possible, not only cuts that outlay in a shorter period of time but cuts the interest you’re paying—which, as far as your retirement is concerned, is “empty” money—it certainly doesn’t cover any of your retirement expenses and makes your loan payments higher.
8. Consider—or reconsider—that plan to retire abroad.
You likely won’t be able to take any immediate steps in this direction whatever you decide, CNBC reports that it could be time for a reevaluation of your plans.
If you’ve been yearning for a retirement on foreign shores, take a bit of time to refocus on things to which you may not have given much consideration: health care (how will you pay for it, with no Medicare available?), medical facilities (how many/how far away are they? How accessible?) and even caregivers (if you fall ill, who will care for you?).
Will they even allow emigration or property purchase, not to mention buy-in to their health systems, in the wake of the crisis? And you should also investigate whether any endemic ailments could threaten your own immune system.
Still, don’t lose the dream just yet; on the other end of the immediate crisis, the lower cost of living found in many overseas locations could help you survive the lost decade.
7. Understand your health coverage.
Even if you’re staying here, and not switching to another country’s health care system, you need to know what yours covers and what it won’t pay for—and how tough it will be to make them honor their commitments.
As care payment denials run rampant, surprise medical bills wreak havoc even with the best plans and drug prices soar out of sight, take the time to go through what you have, whether it’s Medicare, Medicaid, a supplement or private insurance, and be as prepared as you can to seek whatever approvals or other requirements must be had before you can reasonably expect them to pay for your care.
6. If you need more cash, pick safe ways to earn it.
A Kiplinger report highlights the fact that even if you do need more money, it can be dangerous (or even impossible) to find another job to supplement your income under a coronavirus lockdown.
It suggests a number of safe ways to up the household income while everyone is (or should be) hunkered down, including selling off unwanted or surplus belongings (electronics, books, furniture, collectibles, jewelry, etc.), searching online for unclaimed property, signing up with a market research firm to be paid for your opinions, redeeming rewards points and even selling unused gift cards online.
Some of its suggestions can even turn into long-term earning gigs, such as turning your back yard into a dog park or becoming an online influencer.
5. Cash flow management.
Cutting unnecessary expenses is one way to manage your cash flow, but just a part of what should be a comprehensive plan. Not only should you be calling credit card companies to ask for a break on interest rates and Just. Not. Buying. unnecessary items, but you should look into such opportunities as refinancing your home with interest rates so low.
In addition, you should be maxing out any retirement plans—particularly if you’re not already contributing enough to get the full match provided by your employer—and shunting any extra money at the end of a pay period into some form of savings, whether it’s for retirement, an emergency fund or simply a cash reserve.
Also take advantage of any automatic savings methods, such as change from your checking account being automatically transferred into your savings account, so that it’s a relatively painless process.
4. Work longer.
The longer you can stay active in the workforce, with a steady income, the longer you’ll have to make up for lost ground from the onset of the coronavirus and the tumble in the markets.
And the longer you can postpone claiming Social Security benefits, until you hit the age of 70, the more those monthly benefits will grow.
If you can keep working till 70, those benefits will have hit their maximum level and you can claim as well as work, which will make your financial life considerably easier.
3. Stay globally diversified.
Different countries will recover at different rates from the pandemic, and some may begin to hum along nicely long before the U.S. is able to climb out of the cellar.
If you diversify your investments globally, you can take advantage of such early recovery rates and begin to see positive returns from nations whose crises have ended earlier than ours.
Think back, if you will, to that not-so-long-ago time when people were hesitant to invest in emerging markets—and lost out on all the returns as their economies rose and profited. Need we say more?
2. Transfer some risk to an insurance company.
While it’s necessary to do lots of research and exercise plenty of caution to make sure that you’re choosing one that’s right for you, consider offloading some of your risk to an annuity.
There are plenty of different kinds, some of which offer good protection against further market falls and others that simply pass the risk back to the annuity holder, so you do need to be well versed on the features and protections a possible annuity offers—as well as its true cost in terms of what you get back in exchange for your money, and, of course, the financial health of the company.
But the right annuity can provide you with lifetime income and remove some of the risk from your shoulders, particularly if you dread the thought of managing your own portfolio in the years ahead.
1. Think outside the box.
When looking for ways to carry out the above strategies, always try to think outside the box and look for new solutions—or for ways that traditional solutions can be turned on their heads to provide a way forward that suits your needs better than “the way it’s always been done.”
A little ingenuity and creativity applied to the situation can provide you with a better future than might otherwise be anticipated if we truly end up in another lost decade.
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