Retirement Investment In Volatile Times: Insights From Experity Wealth

The past two years have thrown more than a few curveballs at investors and retirees. With inflation reaching levels unseen in decades, interest rates playing leapfrog, and market dynamics shifting unpredictably, it's become clear that the usual retirement playbook needs a few updates. As you navigate these unpredictable waters, there's no shortage of intriguing trends and insights that can shed light on where the US economy and housing market might be headed.

With some guidance from the experts at Experity Wealth, we'll dig into these developments and explore practical strategies to weather the uncertainty while keeping your retirement goals on track.

US Economic Shifts: The Impact of Inflation and Interest Rates

Inflation surged to a 40-year high in 2022, peaking at 9.1%. The Federal Reserve responded aggressively by raising interest rates, causing borrowing costs to spike across the board. While inflation has since eased, reaching 3% by mid-2024, interest rates remain relatively high, though they are expected to decline gradually throughout the year. For retirees and those planning their financial futures, this period has been challenging, as higher rates typically depress asset prices and increase the cost of borrowing (source).

The Fed's tightening has had a ripple effect across the economy, slowing down housing demand and cooling the tech sector, which had seen explosive growth during the pandemic. However, a softening labor market and favorable inflation data are leading to speculation that the Fed might cut rates sooner rather than later, offering some hope to investors and home buyers alike (source).

Housing Market Dynamics: Prices, Inventory and Affordability

The US housing market has experienced a significant transformation over the past two years. Rising mortgage rates—climbing from around 3% in 2021 to nearly 7% by 2023—dampened demand and left many prospective buyers on the sidelines. Despite this, home prices remain high due to a severe inventory shortage. The US is currently short by approximately 4.5 million homes, a deficit that continues to prop up prices even amid affordability concerns (source).

Looking ahead, as interest rates ease, housing demand is expected to increase. However, supply constraints mean that home prices are unlikely to drop significantly. According to recent forecasts, home prices could rise by 3-6% in 2024, driven largely by strong demand from first-time homebuyers who have been waiting for a more favorable market (source).

Tech Stocks and Market Volatility: Navigating Growth and Risk

The tech sector, once the darling of the stock market, faced severe pressure as interest rates climbed. Valuations that seemed reasonable during a low-rate environment quickly became unsustainable, leading to sharp corrections in major tech stocks. Yet, as inflation cools and rate expectations stabilize, the sector is showing resilience. For retirees, tech stocks can still offer growth potential, but they come with inherent volatility. Balancing these growth assets with safer, income-generating investments like bonds or dividend stocks is key during uncertain times.

Robert Cannon, a fiduciary financial advisor and co-founder of Experity Wealth, advises a measured approach: "Volatility in tech is not new, but retirees should focus on balancing growth opportunities with stable income streams. Diversification remains crucial to mitigate risk in this environment."

Investment Strategies for Retirees in Volatile Markets

Given the current landscape, retirees and those nearing retirement must tread carefully. Diversifying across multiple asset classes—such as equities, real estate, and bonds—can provide the balance needed to weather economic fluctuations. International diversification is another approach worth considering, though it comes with its own set of risks, particularly currency volatility.

For those interested in real estate, targeting regions with stable population growth and consistent rental demand can offer solid returns. However, instead of directly purchasing property, retirees might explore Real Estate Investment Trusts (REITs) as a way to gain exposure while maintaining liquidity.

Outlook for 2024 and Beyond: Anticipating the Next Moves

The overall economic outlook remains cautiously optimistic. While interest rates are expected to decline, they will likely remain above pre-pandemic levels for some time, keeping borrowing costs elevated but offering gradual relief to homebuyers. Experts forecast modest gains in both home prices and equity markets in 2024, meaning that retirees should focus on stability while keeping an eye on opportunities as the economy stabilizes further.

In summary, planning for retirement in these volatile times requires a strategic, well-diversified approach. As Cannon notes, "It's essential to adapt to changing conditions without making hasty decisions. Retirement is a marathon, not a sprint, and the key is to stay focused on long-term goals while remaining agile enough to adjust as needed."

A Balanced Approach To Avoid Mistakes

One of the biggest mistakes retirees make is being either too conservative or too aggressive with their investments. Many retirees fall into the trap of shifting entirely to low-risk, fixed-income investments, fearing the volatility of the market. While reducing risk is important, abandoning growth assets like equities can lead to insufficient returns, leaving them vulnerable to outliving their savings. On the other hand, some retirees chase high returns by investing too aggressively, especially in speculative assets, without fully understanding the risks. Both extremes can undermine long-term financial security. Successful retirement planning involves striking a balanced approach that considers growth potential while managing risk, ensuring that your portfolio can weather market fluctuations and still support your lifestyle over time.

Here are five interesting facts about US retirees:

1. Lack of Preparedness: A significant portion of Americans are underprepared for retirement. According to recent studies, nearly 25% of people aged 55 and older have no retirement savings at all, and nearly half have saved less than $100,000—well below what is needed for a comfortable retirement.
2. Considering Moving Abroad: Roughly 15% of American retirees are considering moving abroad to stretch their retirement dollars, driven by the lower cost of living in countries like Mexico, Portugal, and Costa Rica. This trend is especially popular among those looking to maintain a comfortable lifestyle while reducing expenses.
3. Longer Life Expectancy: Life expectancy in the US continues to rise, leading to longer retirements. Many retirees now need their savings to last 20 to 30 years or more, which is why longevity risk (outliving savings) is a growing concern.
4. Delayed Retirement: About 40% of Americans are choosing to delay retirement past the traditional age of 65. This trend is driven by both financial necessity and the desire to stay active, as many realize they need more savings or simply enjoy their work.
5. Dependence on Social Security: Social Security remains the primary source of income for many retirees, with around 50% of retirees relying on it for at least half of their income. However, Social Security was only designed to replace about 40% of pre-retirement income, highlighting the shortfall many face if they don't have additional savings or income streams.

Conclusion

Navigating retirement investments in a volatile market is undoubtedly challenging, but with careful planning and the right strategy, retirees can still achieve their goals. By focusing on diversification, monitoring economic trends, and being willing to adjust strategies as conditions change, the path to a secure retirement remains within reach.

Robert Cannon, co-founder of ExperityCPA and Experity Wealth, is also the author of the book "Putting Your Retirement Interests First: A Prioritized Approach To Protect Your Future and Turn Your Dreams Into Reality" which is available on Amazon.