The Real Lessons The Presidential Election Holds For Your Retirement Strategy
In the days following the presidential election, we’ve seen a deluge of investing and retirement advice. Some is perfectly reasonable: Don’t make any radical moves in your 401(k)! But some recommendations, such as putative ways to “Trump-proof your portfolio,” is in my opinion questionable to say the least. Now that we’ve all had a little time to digest the election results, I’d like to offer a few more fundamental (and sensible) lessons from the election and its aftermath that can help you better plan for retirement in the years ahead.
As polls began closing on election night, The New York Times‘s live online presidential forecast put Hillary Clinton’s chances of winning the presidency at 80% and Donald Trump’s at 20%. Within just a few hours, those figures had flipped flopped. The Times was giving The Donald an 80% or better shot at capturing the White House while putting Hillary’s chances at 20% or less.
Meanwhile, as Trump’s prospects of winning improved, Standard & Poor’s 500 futures plunged as much as 800 points, leading some pundits to predict the stock market would crater the next day. In fact, stocks soared and the Dow hit a new record high two days after the election.
It would be foolish to disregard all projections and forecasts just because of two recent instances of calls gone bad. At the same time, though, there’s been ample evidence in recent years that suggests it’s wise to take forecasts of all sorts with more than a few grains of salt—and smarter still to avoid making dramatic changes to your investing or retirement plans based on prognostications, no matter how accurate they may seem at the time.
Take the case against bonds. For at least five years now, many investment pros have been warning that rising interest rates would trigger a meltdown in the bond market. But while rates have ticked up from time to time in recent years and the broad taxable bond market suffered a small loss (2.3%) in 2013, investors who maintained their bond holdings earned an annualized 2.4% or so over the past five years. Not cause for jubilation perhaps, but not the predicted Armageddon either, and certainly better than how investors would have fared had they heeded the doomsayers’ warnings, fled bonds and hunkered down in cash.
That’s not to say that bonds won’t take a beating at some point, particularly if the Federal Reserve begins nudging rates upward in earnest. Indeed, since the election 10-year Treasury yields have climbed from just under 1.9% to as high as 2.3% amid concerns that President-elect Trump’s promised tax cuts and infrastructure spending could lead to higher government debt and inflation. But since we don’t know how high bond yields might go and how long it will take them to get there, doing something as extreme as excluding bonds from your portfolio makes little sense, if for no other reason than bonds remain a good way to protect your portfolio against stocks’ much greater potential for short-term losses.
Rather than making moves based on predictions of whether stocks will or won’t crash or where interest rates may or may not go, you’re better off creating a diversified mix of stocks and bonds that gives you a reasonable shot at building a sizable retirement nest egg under a variety of market conditions. In short, the right way to deal with risk and uncertainty inherent in investing for retirement is setting an asset allocation that jibes with your tolerance for risk, not trying to predict the Fed’s every move or attempting to outguess the markets.
At the same time you’re being careful not to blithely accept the assumptions of investment pros, you also don’t want to get overly confident about your own retirement-planning assumptions. For example, setting a savings rate that will allow you to build an adequate nest egg is key to achieving a secure retirement. Which is why I recommend going to an online tool that can help with that task, such as T. Rowe Price’s retirement income calculator, which you can find in my Tools & Calculators section.
That said, it’s important to remember that the savings rate you settle on also rests on forecasts and assumptions: how the markets will perform, when you’ll retire, the presumption that you’ll stick to your savings regimen throughout your career. If some of those don’t pan out—investment returns come in lower than expected, you’re pushed into involuntary retirement or a bout of unemployment forces you to temporarily abandon your savings plan—the savings rate that seemed to offer a sure path to a comfy retirement could leave you short of your goal.
To reduce the chances of that happening, you’ll want to periodically check your progress throughout your working years and, if necessary, make adjustments to ensure you’re still on track. Even better, you may want to build in a little safety margin early on by saving an extra percentage point or two of pay in the years you can afford to do so or boosting the percentage of pay you save when you get a raise. That way your retirement dreams won’t be entirely dashed if some of your assumptions don’t pan out.
The point, though, is whether you’re trying to determine the right savings rate or withdrawal rate or ideal mix of stocks and bonds, you need to keep in mind that no tool, calculator or person can consistently predict the future. By building some leeway into your planning—a margin for error, if you will—you’ll have a cushion to fall back on should your best-laid strategies go awry.
Finally, perhaps the biggest lesson from the election results is to avoid overreacting to major news developments. For example, late on election night as it became apparent that Trump was on his way to a major upset, New York Times columnist and Nobel Laureate economist Paul Krugman wrote in a blog post that “we are very probably looking at a global recession, with no end in sight.” Two days later in another blog post, he retracted that prediction, admitting that he gave in to the “temptation to predict immediate economic or foreign-policy collapse” and allowing that, after thinking it over, it’s possible that the economy could actually strengthen, if only briefly, under a Trump administration.
I’ll leave it to others to debate the future path of the economy. But for the purposes of retirement planning, the important takeaway from this episode is you want to avoid giving in to the temptation to act in the heat of the moment. Better to maintain your cool and avoid making moves you may later regret.
In the months and years ahead I’m sure we’ll get plenty of predictions of how the financial markets will react to any number of Trump administrations policies, along with lots of investing and retirement advice based on the assumption that those predictions will pan out. At the same time, we’ll no doubt also have experts weighing in on the usual suspects—interest rates, oil prices, corporate earnings, inflation, the likelihood of a market surge or crash—and telling us why we need to discard our current strategy and switch to a new one if we want to prosper in the months or years ahead.
I’m not suggesting you ignore the financial or political news. It’s wise to stay informed. Just don’t feel compelled to act on it. Instead, when it comes to planning for retirement, you’re better off setting a strategy grounded in the things over which you have the most control—how much you save, how broadly you diversify, how much risk you take by devoting more or less of your retirement accounts to stocks and, once you reach retirement, how much you withdraw from your nest egg—and then deviating from that strategy as little as possible.
Do that, and you’ll increase your chances of achieving a secure retirement, even if the future unfolds in ways you didn’t expect. (11/12/16)