Dave Goodsell is executive director of the Natixis Center for Investor Insight, a research program dedicated to the analysis and reporting of issues and trends important to investors, their financial professionals, money managers, employers, governments and policymakers.
From the coronavirus pandemic to a drawn-out presidential election season to the fastest market correction in history, 2020 felt like the year that wouldn’t end. Thankfully, with the final results of the election in November and a series of new vaccines in December, there is reason to hope for a return to normal in 2021.
While it may have never felt better to turn the page to a new year, uncertainty still persists. We have vaccines, but the pandemic rages on. We have a new government, but polarization continues. We have returned to record market highs, but wonder how long the bulls can run. The future may be brighter, but there is still uncertainty. And that can put retirement savers on shaky ground.
Most of the challenges faced by retirement savers are well-known: Low savings rates, limited access to quality retirement plans, lack of proper investing advice, student debt for younger workers, and other factors that make it harder for individuals to save for retirement, even as private pensions and Social Security recede as contributors to security.
As job losses grew during the pandemic, financially strapped workers reduced savings and made retirement plan withdrawals and employers cut or froze matching contributions to 401(k) plans. Interest rates lowered to stimulate economies also make it harder for pension managers and retirees to generate income. And higher public debt driven by deficit spending to offset the pandemic’s impact may crowd out future spending on retiree needs.
How does it all play out for workers planning for retirement? Simple: Expect the unexpected, and remember that planning needs to be flexible. Minimize preexisting assumptions and rely on factual observation. And put yourself in the best position to benefit from – or at least be minimally harmed by – future trends or conditions beyond what we know today. Here are six steps workers can take to prepare for retirement without knowing what the world will be like in a year, much less than when they finally retire:
Fully fund retirement plans
Take advantage of available savings vehicles such as auto-enrollment and auto-escalation, which ensure that contributions automatically begin with employment and increase over time. It’s simple: The more you save, the better able you will be to withstand volatility across time and take the inevitable losses, and the better-positioned you will be to capture gains. Individual retirement accounts are a tax-advantaged option for those without access to a defined contribution plan.
Accept free money
Investors should maximize any company match available through their retirement plan: It literally is free money, and represents an annual return net of taxes. Investors understand this: More than half (56%) of those responding to a Natixis study say they participate in their employer’s retirement plan because of the match, and about as many (57%) say they would save even more if an increased match were offered.
Keep it simple
Investment decision-making is challenging, and becomes more so if unnecessary complexity is added to the process. Investors should follow a diversified approach with a blend of strategies and asset classes, with growth and value, equities and fixed income and other assets aligned with investor goals that can improve risk-adjusted portfolio returns. Diversification remains a bedrock principle of investing that long-term investors forget at their own peril.
To thine own self be true
Natixis research has shown that investors, especially among the younger generations, are more enthusiastic about investments that are aligned with their personal values and ethics. Responsible investing, such as that with an environmental, social and governance (ESG) focus, encourages investors to add to their holdings and, of course, their retirement savings. Moreover, in periods of rough markets, ESG strategies typically have proven relatively defensive, with less risk than traditional funds.
For instance, during severe market volatility in the first half of 2020, sustainable funds weathered the period better than portfolios without a focus on ESG factors. If their retirement plans do not offer ESG options, investors should inquire about them.
Seek sound advice
For each day trader who strikes it rich, there are a hundred self-directed investors who trail the markets. Investment professionals can provide not only guidance on specific choices but self-awareness and perspective that are hard to achieve on one’s own.
For instance, one Natixis study found that professionals are more likely than investors to see blind spots, concluding that investors focus on short-term returns and don’t understand the risks in current markets. Another study found that workers with financial advisors contribute more of their salary to a 401(k) plan, with 7.2% for advised participants vs. 6.5% for non-advised.
Prepare for the worst, hope for the best
With uncertainty about when interest rates and investment returns will rise again, workers would be wise to plan for greater self-sufficiency. This could mean transitioning to a new career rather than ceasing work; planning to live on less retirement income with a more restrained lifestyle; and planning to make savings last for potentially longer lifespans. They’ll need to make investment decisions that will help them prosper in such a world.
Each of these steps is a common-sense way to mitigate the uncertainty of the coming months and years and to manage the attendant risk and volatility. Preparing for uncertainty means embracing uncertainty; we can’t know the unknowable, but we can take steps to prepare for any likely outcome while remaining flexible enough to adapt to changing realities.
Read more information and tips in our Retirement planning section