Breathing New Life Into Your Retirement Strategy

If life is a merry-go-round, and retirement is the brass ring, then we all could benefit from a hearty gut check before making our grab.

Why? Because although the statistics indicate you are likely in for a long ride (with higher life expectancies than any generation prior), those extra years don’t come free.

And most Americans are woefully underprepared.

This is a critical issue for American society today,” says BlackRock Chairman and CEO Larry Fink. “We all have a big blessing in front of us in the form of longer life. But the blessing needs to be achieved with dignity, and that means being able to afford it.

RECALIBRATING THE CAROUSEL

Retirement savers, it seems, have fallen into a dangerous pattern. The vicious cycle is one in which they are relying on the existing momentum to continue to provide some form of retirement security. The reality, however, is that the retirement system in the United States is ailing and in need of a recalibration.

Visualize the current retirement paradigm as a stool with three legs: 1) Social Security, 2) employer-sponsored plans and 3) individual retirement savings. Each one of those legs is wobbly:

  • Social Security

    The Social Security system is facing a well-known funding challenge. Current estimates are that benefits will be reduced by 23% starting in 2033. And while Social Security was never intended to provide for a full retirement, estimates are that nearly 50% of Americans rely on it for 90% of their retirement income.

  • Employer-Sponsored Plans

    The most popular employer-sponsored retirement programs a generation ago were defined-benefit (DB) plans, better known as pensions. Under this arrangement, the financial onus is largely upon the employer to ensure ample funds are set aside and invested to provide certain promised benefits to employees and retirees for the duration of their lives. Pensions have proved difficult for public and private employers to sustain as the ranks of retirees grow and longer life expectancies makes fulfilling the lifetime obligations a much larger financial commitment.

  • Individual Retirement Savings

    Defined-benefit pension plans are increasingly being replaced by defined-contribution plans (e.g., 401(k), 403(b) plans), which are funded primarily by employee contributions. The problem is that people aren’t setting aside enough, nor do they know how to quantify “enough.” The same dilemma applies to the third leg of the stool, individual savings. There simply isn’t enough being funneled into IRAs (which are subject to annual limits to begin with) nor into other personal savings accounts.

With all three legs of the stool looking shaky, saving enough for retirement is proving difficult.

GETTING A LEG UP

Mr. Fink is encouraged by the government’s perceived willingness to address the challenge. He describes the recently introduced MyRA savings plan as a vehicle for “kicking off a much needed national conversation” around retirement savings.

“We’re engaged in these conversations, but we also want investors to hear a very clear message,” says BlackRock President Rob Kapito. “You can’t save for the future in the future. Now is the time.”

Mr. Kapito extends a simple invitation: “Get invested.”

But how? And in what? Following are several ideas from BlackRock’s market experts that just may help you breathe new life into your retirement portfolio:

  • Stick With Stocks. . .

    Stocks are no longer cheap, but they still stand out versus the alternatives. Hands down, stocks offer a better value than either bonds or cash investments, which offer little return after inflation and taxes. Granted, some areas of the U.S. stock market are more expensive than others, so it pays to be selective. It also pays to extend your sights beyond U.S. borders.

  • . . . But Look Abroad

    Europe is one area where stock prices appear much more attractive than those in the U.S. The region is rising out of recession, and growth prospects are looking promising. If you have a long time horizon (and a fairly strong stomach given the inherent risks and volatility), consider emerging markets. After taking a beating last year, prices are attractive (particularly relative to the U.S.) and the emerging world still has compelling growth prospects. In addition, the gap between negative sentiment and the realities on the ground can be wide—presenting opportunity.

  • Choose Your Bonds Wisely

    The bonds formerly known as the “safe haven” and go-to of retirees (i.e., U.S. Treasuries and other government-related debt) present a risk today. As interest rates rise (and most expect they will), bond prices fall. This is a dynamic bond investors haven’t experienced in some 30 years, so it may feel impossible. But it’s very possible (probable even) that any pick-up in interest income as rates rise will be more than offset by the loss in principal value on those bonds. We saw it already in 2013.

     

     

  • Consider Unconstrained

    In this “new world” of bond investing, we have been recommending investors consider unconstrained income strategies. Essentially, these are actively managed strategies that have the flexibility to tap any and all opportunities in the bond world, all while seeking to manage risk. Given the volatile interest rate environment and the complexity of investing in today’s fixed income markets, this may be the ideal time to hand your bond strategy over to the professionals.

  • Break With Tradition

    If you’re still of the belief that you need to heavy-up on bonds as retirement nears, it’s time to challenge that thinking. And do it now before rates head higher. Retirees who traditionally relied on Treasuries for income might consider other sources, such as tax-advantaged municipal bonds or even dividend-paying stocks, which can offer much-needed growth potential. (Keep in mind, there is no guarantee that stocks or stock funds can continue to pay dividends.)

  • Don’t Stop Growing in Retirement

    That brings us to our final point, or perhaps to our first point—the need to grow your assets. Don’t make the mistake of thinking this need expires in retirement. Even as you draw down your nest egg to generate income, your assets still require an element of growth, if only to stay ahead of inflation. Again, consider professionally managed vehicles, such as a global, multi-asset solution that has the reach to span the globe, as well as the ability to mix asset types and levels of risk in an effort to manage volatility—an important consideration in the retirement years.

ENJOY THE RIDE

Ultimately, the retirement savings gap is one that will need to be addressed with all horses in the race. It will require input and action on the part of governments, corporations, financial institutions and individual investors. Only then can a full-blown crisis be averted. In the meantime, Mr. Fink and Mr. Kapito encourage investors to take whatever steps—big or small—they can today to ensure that their long life is enjoyed free of financial hardship.

The Wisdom of Elders

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Stock and bond values fluctuate in price so the value of your investment can go down depending on market conditions.

International investing involves risks, including risks related to foreign currency, limited liquidity, less government regulation and the possibility of substantial volatility due to adverse political, economic or other developments. These risks often are heightened for investments in emerging/ developing markets, in concentrations of single countries or smaller capital markets.

Bond values fluctuate in price so the value of your investment can go down depending on market conditions. The two main risks related to fixed income investing are interest-rate risk and credit risk. Typically, when interest rates rise, there is a corresponding decline in the market value of bonds. Credit risk refers to the possibility that the issuer of the bond will not be able to make principal and interest payments.

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