Retirement New year, new opportunities to refresh your retirement planning

With 2022 behind us, the markets have reset and so too should your retirement mindset – which was the topic of the hour at J.P. Morgan Wealth Management’s recent event, “2023: New year, new opportunities to refresh your retirement planning.”

Jeff Kreisler, Head of Behavioral Science at J.P. Morgan Private Bank, was joined by Elyse Ausenbaugh, Global Investment Strategist for J.P. Morgan Wealth Management, and Sharon Carson, Retirement Strategist for J.P. Morgan Asset Management, to discuss reviewing your retirement plans in the midst of economic and legislative changes.

Look at what you can control and what you can’t

“This has been a rough little stretch for the market,” Kreisler said. “We went through a lot of volatility last year. Things are uncertain [for 2023], it’s not clear what’s going to happen, and that can cause some anxiety and some concern, particularly for those of us that might be thinking about retirement.”

Kreisler’s solution is to look at retirement planning through the lens of behavioral science: the study of how emotion and psychology impact decision-making and behavior. He wants to normalize that feeling of uncertainty.

“As we think about retirement, as we think about any financial planning, it’s important that we work to control what it is we can control,” he continued.

“We can’t control the market. We can’t control Congress. We can’t control if someone around the world wants to invade a country that impacts energy markets. We can’t control these things, but what we can control are our investment decisions, our goals, and how we respond to activities that are outside of our influence. Take control of what you are able to – and ultimately that really starts with being well-informed.”

Why has the last year been so hard on investors?

Being informed starts with understanding why 2022 was so hard on investors, and what that means for the coming year.

“We dealt with this perfect storm of risks that ended up roiling markets. You, of course, had Russia’s invasion of Ukraine, you had China’s property sector woes and their ongoing struggle with COVID-19, and here in the United States, in Europe, and many economies around the world, we were dealing with decades-high inflation. That warranted [a] response from central banks, which ended up manifesting as the most aggressive and globally coordinated rate-hiking cycle that we have seen in decades. So, it was a very volatile year,” explained Ausenbaugh.

Ausenbaugh points out that, to make matters worse, core bonds were hit hard and saw their worst year of performance on record. And more than a year into the selloff, the S&P 500 is about 18% off its highs from the beginning of 2022. Even a well-balanced portfolio is still down about 14%-15%, which can be hard to stomach, especially if you’re someone who’s already retired and taking distributions.

Will investors see an equally bad 2023?

According to Ausenbaugh and the professionals at J.P. Morgan, the United States will likely enter a recession in the second half of 2023. This will come as a result of the rate hikes from 2022, which were designed to bring inflation down but will bring economic growth down alongside it.

Fortunately, a recession does not directly correlate with market performance.

“What investors need to remember is that pain that we went through [in 2022] was the anticipation of the economic pain that we expect to play out in the months ahead,” Ausenbaugh said. And because markets are forward-looking, that bodes well for market stabilization in 2023.

“Bottom line, although the economic backdrop may deteriorate over the course of this year, we do think that markets could find their footing, and that this year could potentially be better than what we went through in 2022.”

Understand what you need to save for

As Kreisler recommended, shifting your focus from what you can’t control (the economy and the markets) to what you can control (your retirement plan) is crucial. More specifically, you need to nail down what exactly you’re saving for.

One of those key items, said Carson, should be health care.

“Even if you have good health behaviors, your body does age over time – that’s out of your control. I know when I hit 50, it’s like the warranty expired, and all of a sudden I was using more health care. So you use more of this higher-inflating good as you get older. You need to consider your portfolio and what mix you have to keep up with inflation. Cash will erode over time, so you really do need to stay invested,” Carson said.

Understand how long you need to save for

Hand-in-hand with knowing what you’re saving for is knowing how long you need those savings to last. You may live longer than you think, in which case your nest egg needs some real stretch.

“There is a 50/50 chance that at least one person in a couple 65 years of age will make it to age 90,” Ausenbaugh said. “If you retire at 65 and you’re going to live until 90, that’s a 25-year time horizon.”

Ausenbaugh recommends thinking about investing according to different time horizon buckets. That means looking at what you’ll be spending over the next year, as well as the money you’re going to need 10 and 20 years from now.

Develop a plan of action

There are some silver linings to the rise in interest rates and market selloff that happened in 2022.

Ausenbaugh outlined them: “For one, we now have this opportunity to actually earn some income on the cash or short-term liquidities that we hold. Two, we can lock in higher yields for years to come by investing in high-quality core bonds. And three, we can also take advantage of stocks effectively being on sale as a really compelling long-term entry point to continue growing our wealth over the years to come.”

“The way that you might consider putting that into practice is by first determining how much money you need per year in retirement, based on things like your lifestyle or potential health care spending needs. The money that you’re going to need for the next year or two can and should stay somewhere relatively safe and liquid. Think things like deposit accounts for day-to-day spending needs, or ultra-short, ultra-high-quality parts of the bond market, or options like money market funds, to pick up a bit more yield on your liquidity savings cushion,” she said.

From there, you need to determine what mix of assets like stocks and bonds to invest in, so that your money can hopefully beat out inflation and fund your lifestyle for years to come.

Kreisler added, “Within retirement, there is a lifespan, there is a time horizon, there is 25 years. Think about what you need the next couple years, and that other money can work for you in the long run. There’s still a long run even in retirement.”

Pay attention to the tax implications of your retirement accounts

Regardless of what retirement accounts you have, you should be contributing. Carson suggests maxing out your IRA contribution limit each year and taking advantage of catch-up contributions too. But as you near retirement, you do need to be thinking about which types of accounts you’re funding – and what that means for your taxes.

“Uncle Sam really wants to get their money. And that’s definitely true for retirement accounts – they want to get it upfront or they want to get it later. If you think your taxes are going to be lower later, that’s when you want to take advantage of those traditional accounts. To get the tax break when you take the money out in retirement, that’s when that Roth vehicle really becomes an absolutely fantastic vehicle as well,” Carson explained, noting that having a mix of account types, including Roth accounts, can give you more control of your taxes in retirement.

Investing principles to keep front of mind

As you’re developing your retirement plan, there are some general investing principles to remember. These include:

• Having a plan and reviewing it every year
• Making sure your portfolio is diversified
• Staying invested despite market volatility

“[These principles] are always important to keep in mind, but all the more so when we’re in the kind of market environment that we’re in today, where volatility is high, everyone’s thinking about recession, and things feel really intimidating,” Ausenbaugh said.

Ausenbaugh wants to normalize market volatility, especially. The average calendar year over the last 40 years has seen the stock market go through an intra-year drawdown of 14%. That’s why investors need to keep a long-term perspective for their money.

“If you were invested in a 60/40 portfolio over the past decade, even having gone through things like the Euro crisis, the global pandemic, [and] last year’s market selloff, that 60/40 portfolio has appreciated about 150%,” Ausenbaugh said. “Staying invested does work.”

Ausenbaugh, Carson, and Kreisler all recommend getting in touch with a J.P. Morgan Wealth Management advisor to form the best foundation and plan of action for your retirement. There are also things you can do on your own, such as utilizing a planning app. However you accomplish it, retirement planning is paramount to making your nest egg last and bringing down the anxiety you might experience during rocky economic periods.