As inflation fails to budge and the potential for recession looms, retirement savings are taking a massive hit.
Over the past few years retirement assets been put under stress by the long-term decline in interest rates and exacerbated by the COVID-19 pandemic and forced investors to sell equities at precisely the wrong time. In 2021, the consensus was there would be a period of time where a surge in inflation and higher interest rates would affect the broader economy, and as a result have a further negative impact on retirement assets. In 2022, that prediction has come true. While markets have not seen a return to the high inflation of the 1970s, a CPI of nearly 10% continues to eat into the purchasing power of fixed income and other investments. Higher yielding government bonds, which are typically more attractive to investors have also not yet been realized.
How large is the retirement industry, really?
The retirement industry has become very large, with retirement investments valued at more than $33 trillion. This means that the largest share of US corporate stocks is now made up of retirement investments. Many people in the United States do not have enough money saved up for when they retire. This is especially true for people who earn low incomes. Without enough money to cover basic living expenses, retirees are forced to make difficult choices between their health and their wallet. This problem is only getting worse as the cost-of-living increases and Social Security benefits do not keep up with these increases. The combination of higher inflation and higher interest rates will continue to put pressure on retirement assets and those who are in desperate need of retirement income.
Even though asset prices have rebounded sharply from their June lows, retirement accounts in the West have still been hit hard. Norway’s sovereign wealth fund, for example, reported a 14.4% decline over the six months through June. So, while the markets may be trying to “steal your money” again in the short-term, it’s important to keep a long-term perspective and stay focused on your goals.
How about public pension plan sponsors and plan participants who invested in volatile assets?
The NYC Comptroller’s office has estimated that the city will face a fiscal shortfall of $4 billion in each of the next three fiscal years. This is due in part to the fact that the city’s pension fund is not performing as well as expected. CDPQ, a pension fund in Canada that recently wrote off its $150 million investment in Celsius Networks, a crypto lending platform, shows the affect inflation and asset prices instability is happening across asset classes. The decision to enter “too soon into a sector that was in transition” was made by CDPQ chief executive Charles Emond. Alex Mashinsky, CEO of Celsius, had previously said that the company’s $3 billion valuation would “double or triple” within a year. However, after bitcoin subsequently slumped to $23,000, Mashinsky’s predictions have not come true.
Given this volatile dance between rates and asset prices, developing a playbook for your personal investing situation is probably a good idea. There are few tried and true methods which begin with a review of your current portfolio(s) and consider how to protect your assets from inflation and interest rate risk. One way to do this is to invest in assets that are less sensitive to these risks. For example, stocks tend to do well when inflation is rising, as companies can pass on higher costs to consumers. Another way to protect against inflation and interest rate risk is to invest in assets that have a high degree of liquidity. This way, if you need to sell an asset in a hurry, you will be able to do so without incurring a large loss. Lastly, investors should always diversify their portfolios. This will help to protect them from the risk of any one asset class underperforming.
If you are concerned about the impact of inflation and interest rates on your retirement assets, I recommend that you speak to a financial advisor.
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