To a great extent, how you approach investing is a lot about how you deal with four unknowns: longevity, inflation, market returns and tax policy. In this article, we break down each of these unknowns, and offer suggestions for ways that may help insulate you from their risks.
No one knows for certain how long they’ll live, although we do know what can help us live longer. Genes play an outsize role, as does eating healthy, not smoking, exercising and managing stress. Even where you live — down to the ZIP code — may have an influence on your life expectancy.
Reflecting the recent mortality distortions caused by the global pandemic, a girl born in the United States in 2020 can expect to live an average of 80.2 years, and a boy 74.5 years. On the other hand, the United Nations is predicting the number of centenarians in developed and developing countries will rise to about 573,000 in 2021 (the US has more centenarians than anywhere else in the world, at about 97,000). To support a retirement that could last for 20, 30 or 40 years, you need to create a financial plan that considers your life expectancy and supports that timeframe with a well-constructed, diversified investment portfolio. In our financial plans, we regularly project life expectancies to at least age 90.
There’s been lots of news about rising prices lately, but you don’t need to turn on the TV or pick up a paper to see the impact — we’re all paying more at the pump and grocery store. Most economists agree that supply-chain disruptions and pent-up consumer demand are the major causes. What’s less understood is how long this bout of inflation will last. There are some early signs that many of the supply-chain issues may have peaked in October 2021 and, as a result, prices could start coming down in mid-2022.
Further clouding the economic picture are rising interest rates. This introduced more volatility into the stock market in January, as some investors shift their allocations away from riskier investments. As always, we believe having a well-diversified core allocation of stocks and bonds is the best way to navigate inflationary periods. This may be time to broaden your investment toolkit to add exposure to asset classes that are not as sensitive to inflation or rising interest rates.
No one has ever been able to consistently predict what the stock market in total will do over the next 30 days, six months or a year. But history shows that over longer periods of time, say five, 10 or 20 years, stocks have advanced (although past performance is no guarantee of future results).
What makes the present market environment so unpredictable is that we’ve had such a long period of rising stock prices, it requires continued strong earnings growth to maintain high valuations. This may not be sustainable forever. Trees don’t grow to the sky, and eventually, markets correct as part of a normal cycle. However, trying to time when the best time to get in or out of the market is nearly impossible to do with any regularity. That’s why we believe that an investment portfolio has to start with something you can control: Defining your goals and defining how much you’ll need to make them a reality.
Tax policy is one of the most complex and opaque cogs in the US economic system. If you make decisions about your money based on the belief that tax policy remains static or predictable, eventually you may be caught off guard.
Managing your current and future tax burden is a big part of retirement planning, as state and income taxes, property taxes and estate taxes all affect how much of your money you’ll keep. We recommend diversifying your assets by tax location, which may help you improve your financial position no matter whether taxes are high or low.
Preparing for a successful retirement outcome depends on a number of factors, some of which you can control, and some you can’t. What’s out of your direct control are the performance of the markets, interest rates, inflation and tax policy. In your control are your ability to earn an income; your assets and liabilities; your current savings, investments and living expenses; and your health. Putting your energy and focus into what you can control is age-old wisdom, and just as true in today’s uncertain world.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
Bruce Helmer and Peg Webb are financial advisers at Wealth Enhancement Group and co-hosts of “Your Money” on WCCO 830 AM on Sunday mornings. Email Bruce and Peg at firstname.lastname@example.org. Securities offered through LPL Financial, member FINRA/SIPC. Advisory services offered through Wealth Enhancement Advisory Services, LLC, a registered investment adviser. Wealth Enhancement Group and Wealth Enhancement Advisory Services are separate entities from LPL Financial.