Are you a small business owner or entrepreneur saving for retirement? Are you worried about your savings as record market volatility and high levels of inflation erode your purchasing power? If so, you are not alone.
Many of my clients are anxious about the current economic climate and what it means for their long-term retirement plans. But market volatility doesn’t have to mean disaster for your savings. Here are 6 tips to beat inflation and seek to protect your investments from a market crash.
1. Cash Is King
Cash is king, especially during times of market volatility and economic uncertainty. Heading into the new year, we are facing major economic challenges, including global tightening of monetary policy and a persistently high inflationary environment. The Fed has raised rates 6 times in 2022, and they plan to continue these hikes until prices have stabilized. The problem is no one knows when that will be, but many experts believe inflation still hasn’t hit its peak. In June 2022, inflation reached 9.1%, the highest it’s been since 1981, and substantially higher than the Fed’s target rate of 2%.
Taken as a whole, these factors contribute to the belief that a recession is on the way—and likely a severe one. The general rule of thumb when defining a recession is two consecutive quarters of negative GDP growth. We reached that point at the end of June 2022, and yet the National Bureau of Economic Research still has not declared the economy in a recession.
You can’t rely on government agencies to tell you when to prepare; instead, you should prepare yourself for the recession storm by keeping adequate cash reserves on hand. Not only will this help you avoid having to draw down retirement assets during a market downturn, but it will also allow you to be ready to take advantage of discounted investment opportunities.
2. Winter Is Coming
Winter is coming, and it’s not going to be pretty. One of the key drivers of inflation has been the energy sector. The U.S. federal government’s mishandling of the energy sector, combined with the Russian invasion of Ukraine, has sent energy prices soaring.
First demand for oil increased after lockdowns were lifted and economic sanctions were levied against Russia. Then countries that were typically importing their oil from Russia have started redirecting their demand to other areas. The U.S. itself has banned imports of Russian oil and natural gas, increasing the need for improved domestic energy infrastructure to meet demand.
The federal government’s attempt to lower energy prices by releasing oil from the strategic reserve has offered little reprieve.
Unfortunately, government officials have opted for a superficial temporary fix, rather than addressing the important structural changes that are desperately needed to increase our energy supply. As a result, energy production in 2021 is far below the pre-pandemic levels of 2019, and far below where they could be if we had different policies.
For example, U.S. oil producers are producing 1.4 million barrels of oil less per day than they were in pre-pandemic conditions in 2019. You would think production would be more robust given the high gas prices, but instead there is actually less interest in refining oil than ever before. Five oil refineries have shut down in 2020 and 2021 with no plans to reopen as some oil executives are skeptical about the harsh regulatory environment they will be working in if they keep them open.
As we head into winter, demand will spike even more over the next several months, just as the strategic oil release program comes to an end. Not only that, but the current government administration will be faced with replenishing its strategic reserve stockpile.
3. Seek to Protect Your Principal
One piece of investment advice is tried and true when it comes to safeguarding your portfolio from a market crash: Proper diversification is key.
Diversification helps reduce portfolio risk by investing in assets across and within various asset classes. If one asset class underperforms, other asset classes may overperform, which can reduce the overall volatility of your portfolio.
In a high-risk, high-volatility environment such as the one we are currently in, everyone should be concerned with shielding their principal. Annuities can be an effective way to shield your portfolio from a market crash, while also offering the potential for double-digit returns. Annuities provide a fixed stream of income regardless of the current market interest rates. This makes them particularly attractive for safeguarding a retirement portfolio.
4. Create an Income Stream
In order to hedge against both inflation and a market crash, creating multiple streams of income is a must. This will help reduce the strain on assets that may underperform during a market crash and improve your chances of surviving a severe recession during retirement.
There are many assets we look at to create an income stream for your portfolio, including:
- High-yielding dividend-paying stocks
- Alternative real estate investment products
- Guaranteed income stream investment products
5. Reduce Your Taxes
The IRS just hired an army of IRS agents with the new $80 billion investment created by the Inflation Reduction Act. This legislation calls for both stricter tax enforcement measures and increased staffing to improve the IRS’s ability to collect. It is crucial to explore every avenue for tax minimization in order to keep more of what you make in your pocket.
This can be accomplished in a number of ways:
- Backdoor Roth conversions: An option for converting pre-tax funds into tax-free Roth status if you earn more than the income threshold for contributing to a Roth account directly. Once funds are converted, they will have tax-free potential growth and not be subject to required minimum distributions (RMDs).
- Tax-loss harvesting: The process of strategically selling investments at a loss in order to offset the gains in your portfolio. By realizing a capital loss, you are able to counterbalance the taxes owed on capital gains.
- Donor-advised funds (DAFs): Contributions to a DAF provide a current-year’s tax deduction but are then invested to have tax-free potential growth over time. This may result in more dollars for the organizations you support depending on when you decide to transfer the assets.
- Charitable remainder trusts (CRTs): A CRT provides a current source of income for you or a beneficiary and then passes the remaining value to a charity of your choice. Since the trust assets are technically donated to charity before they are sold, a CRT provides tax benefits, including a charitable deduction.
- Qualified charitable distributions (QCDs): QCDs are distributed directly from your IRA account to the charity of your choice. You can donate up to $100,000 per year and it will take the place of your RMD. Unlike RMDs, QCDs do not count toward taxable income.
- Choose the right business structure: This has many tax implications in both how taxes are paid and how you can save for retirement.
- Which retirement plan is right for you? Once you’ve chosen the right business structure, you can choose the right retirement plan and take advantage of tax-sheltered accounts, including solo 401(k), SEP IRA, SIMPLE IRA, and cash balance plans.
6. Get Your Financial House in Order
Do you have a plan? One of the most important steps you can take to shield yourself and your retirement is to get your financial house in order. Start by having a cash reserve and adequate insurance coverage in place. If you have any high-interest revolving debt, consider refinancing if you can find a lower interest rate. If you run a small business, be sure you have plenty of working capital on hand and secure any lines of credit you may need.
Remember that down markets often present unique opportunities, and this can be an excellent time to implement dollar-cost averaging. With this strategy, you invest a fixed dollar amount periodically, regardless of market conditions or investment price. By consistently investing, you can take advantage of the fluctuations in price so you’re buying more shares when the price is low and less shares when the price is high.
Most importantly, you should be working with a financial planner like myself.
Chances are high that your retirement plan is being attacked by both inflation and stock market volatility. Don’t wait to get your financial house in order. Reach out today to schedule a no-obligation, get-acquainted meeting, or call us at 207-504-3614.
Jody James is an LPL financial advisor at James Financial Group, a firm that takes the mystery out of investing, managing risk, and preparing for retirement. With over 10 years of experience in the wealth management industry, Jody works closely with individuals and small business owners to craft creative and customized strategies that allow them to work toward their financial and life goals and preserve their wealth. Serving as a bridge between Wall Street and Main Street, Jody loves the juxtaposition and synergy as he helps clients pursue their dreams while also making an impact on the local community—raising capital for other businesses, entrepreneurs, and innovators.
Jody has a bachelor’s degree in history from Le Moyne College, an MBA from Brandeis University, and holds the Series 7 and Series 66 certifications. When he’s not working, he enjoys traveling, working out, and spending time with his wife and three children, whom he adores. He’s also a huge New England Patriots fan. To learn more about Jody, connect with him on LinkedIn.
There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk. Dividend payments are not guaranteed and may be reduced or eliminated at any time by the company. LPL Financial does not provide tax advice. Clients should consult with their personal tax advisors regarding the tax consequences of investing. Traditional IRA account owners have considerations to make before performing a Roth IRA conversion. These primarily include income tax consequences on the converted amount in the year of conversion, withdrawal limitations from a Roth IRA, and income limitations for future contributions to a Roth IRA. In addition, if you are required to take a required minimum distribution (RMD) in the year you convert, you must do so before converting to a Roth IRA. Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Investing involves risk including loss of principal. No strategy assures success or protects against loss. The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful. Rebalancing a portfolio may cause investors to incur tax liabilities and/or transaction costs and does not assure a profit or protect against a loss. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk. Dividend payments are not guaranteed and may be reduced or eliminated at any time by the company. This information is not intended to be a substitute for specific individualized tax or legal advice. We suggest that you discuss your specific situation with a qualified tax or legal advisor. Traditional IRA account owners have considerations to make before performing a Roth IRA conversion. These primarily include income tax consequences on the converted amount in the year of conversion, withdrawal limitations from a Roth IRA, and income limitations for future contributions to a Roth IRA. In addition, if you are required to take a required minimum distribution (RMD) in the year you convert, you must do so before converting to a Roth IRA. Fixed and Variable annuities are suitable for long-term investing, such as retirement investing. Gains from tax-deferred investments are taxable as ordinary income upon withdrawal. Guarantees are based on the claims paying ability of the issuing company. Withdrawals made prior to age 59½ are subject to a 10% IRS penalty tax and surrender charges may apply. Variable annuities are subject to market risk and may lose value.