When J.P. Morgan Asset Management launched its 2021 “Guide to Retirement,” aimed at helping retirement plan advisers give better advice to participants to improve their retirement savings, it emphasized that possibly the biggest takeaway is that “returns have been good recently, which makes it challenging going forward,” says David Kelly, chief global strategist at J.P. Morgan.
Following that, it remains critical for retirement plan savers to diversify their portfolios. Kelly adds that “inflation and taxes are very much important to think about,” especially in light of all of the monetary and fiscal stimulus that has been implemented to counter the negative impacts of the COVID-19 pandemic on the economy.
Going forward, it is inevitable that returns are going to decline, he says, which means advisers need to recommend “a more sophisticated approach to asset allocation,” namely more diversified portfolios.
Pointing to the dislocations in the market following the 9/11 terrorist attack, the 2008 Great Recession and the 2020 pandemic, Kelly says there was no way anyone could have predicted these events beforehand. “If you knew of the upcoming risks, you could hedge against them,” he says. “Since you can’t know, you need to diversify.”
Kelly also notes that the $4 trillion the government has spent to counteract the pandemic will inevitably lead to higher taxes down the road. All of these factors have implications for long-term investors. “This environment will be challenging,” he warns.
J.P. Morgan now predicts that a pre-retirement investor with a 60/40 portfolio, comprised of 60% equities and 40% bonds, will earn 5.75% a year, down from the firm’s earlier projection of 6% annually, says J.P. Morgan Chief Retirement Strategist Katherine Roy. This will have the greatest impact on older investors, she says, adding that they can best counter this by increasing their savings and retiring later. “They should also consider lifetime income options and diversification, including emerging market exposure,” Roy says.
Given that so many people have cut back on their spending during the pandemic, advisers have a great opportunity to continue to make the case to their retirement plan participants to be thrifty, Roy says. “Retirees pulled back 2% to 9% on their spending, and steady earners, 1% to 2%,” she says. “This is an important time to talk to retirees and pre-retirees about spending that is non-negotiable—and where they can pull back.”
Along these lines, J.P. Morgan’s guide says investors have total control over their spending and asset allocation. They have some control over employment earnings and employment duration, as well as their health, which affects their longevity.
People need to prepare to live 30 or more years in retirement, J.P. Morgan advises. A 65-year-old woman today has an 86% change of living to age 75 and a 73% change of living to age 80. After that, it drops considerably to only a 55% chance of living to age 85 and a 34% chance of living to age 90. For a 65-year-old man, there is a 79% chance of living to age 75, a 63% probability of living to age 80, a 44% probability of living until age 85 and a 23% chance of living until age 90.
However, there are more older Americans in the workforce today, which is one way of offsetting the risk of outliving retirement savings. In 2009, J.P. Morgan says, 26% of the workforce was between the ages of 65 and 74. That rose slightly to 28% in 2019 and is projected to rise to 33% by 2029. Interestingly, only 15% of older Americans say they work in retirement is to make ends meet. The overwhelming reason they work, cited by 62%, is to stay active and involved.
J.P. Morgan also notes that it is important for people to delay taking their Social Security benefits. For those born in 1954 or earlier, they would only get 75% of their benefits if they start taking them at age 62, but 100% at age 66 and 132% at age 70. For those born in 1960 or later, the figures are 70%, 100% and 124%, respectively. The asset management firm notes that “delaying benefits means increased Social Security income later in life, but your portfolio may need to bridge the gap and provide income until delayed benefits are received.”
The firm says that, on average, Americans are saving 7.9% of their salaries, well below the 10% to 15% recommended to successfully fund retirement.
J.P. Morgan also says people should make income tax diversification a priority for their retirement savings and invest in a health savings account (HSA).
The firm warns that “withdrawing assets in down markets early in retirement can ravage a portfolio. Consider investment solutions that incorporate downside protection such as: greater diversification among non-correlated asset classes; investments that use options strategies for defensive purposes; [and] annuities with guarantees and/or protection features.”
Due to inflation, J.P. Morgan also recommends that retirees consider adjusting their spending, based on market conditions, in order to make the money in their portfolios last.
J.P. Morgan also notes that the amount saved early in one’s year is more important than returns, while the opposite is true as one ages: “When saving for retirement, the return experienced in the early years has little effect compared to growth achieved through regularly saving,” the report says. “However, the rates of return just before and after retirement—when wealth is greatest—can have a significant impact on retirement outcomes.”
J.P. Morgan also says people should resist leaving the markets when there is high volatility or declines. “Taking ‘control’ by selling out of the market after the worst days is likely to result in missing the best days that follow,” J.P. Morgan says.
Finally, J.P. Morgan also points to the importance of escalating one’s deferrals over time. If a 25-year-old making $50,000 a year, getting a 2% raise every year, receiving a 5% match and an average return of 5.75% each year is automatically enrolled at 3% into their plan but never increases their deferrals, they will end up with $610,000 in savings by age 65. However, if they start at 3% but increase that amount each year up to 10% and continue at that rate through age 65, they will end up with $1.4 million. There isn’t that much difference between the latter option and starting at a 10% deferral and remaining there; that scenario would yield $1.5 million in savings by age 65.