J.P. Morgan Asset Management released its annual Guide to Retirement, examining five key retirement themes expected to impact financial advisors, defined contribution (DC) plan participants, and clients throughout 2023.
“Retirement investors have experienced unprecedented volatility in the market throughout the last year, and face uncertainty for the year ahead. However, we feel optimistic for the future of retirement security as legislators and policy makers are emphasizing the need for broader access to retirement plans and an increase in savings rates.” said Michael Conrath, chief retirement strategist at J.P. Morgan Asset Management, in a press statement. “Our 2023 Guide to Retirement has been designed to help advisors navigate the evolving economic environment, take advantage of recent legislative changes, and provide long-term investing strategies to drive stronger retirement outcomes for clients.”
Opportunities presented by SECURE 2.0 Act
SECURE 2.0 will encourage small businesses to create retirement plans through increased tax credits. This includes a tax credit for 50% of startup costs up to $5,000 per year for three years, and a tax credit for employer contributions of up to $1,000 per employee for five years.
This provision specifically addresses nearly 50% of those private sector employees working for small businesses who have no employer-sponsored plans and those who have employer-sponsored plans are more likely to save towards retirement by two-fold, according to J.P. Morgan Asset Management.
Importance of building an emergency reserve
The research notes that spending and income shocks are prevalent for workers and retirees alike. Retirees encounter more shocks in larger amounts than workers, likely due to unpredictable healthcare costs. If people don’t have an emergency reserve, they often tap their retirement portfolios prematurely and jeopardize their retirement success. J.P. Morgan Asset Management highlights research from Chase bank consumer data, finding workers need about two to three months of pay in an emergency reserve and three to six months of pay for retirees.
J.P. Morgan Asset Management recommends employees begin by saving an emergency reserve, and then turn to health savings accounts (HSA) and defined contribution savings. After employees set up those vehicles, they can consider paying down higher interest loans like credit card debt and student loans, and lower interest loans.
Strategic adoption of tax-advantaged accounts
Individuals should consider diversifying their sources of retirement income, finds the research. Maintaining a healthy mix of taxable, tax-free, and tax-deferred accounts can provide greater flexibility and control when managing income taxes over time.
This includes new tax implications under SECURE 2.0, which increase the starting age for required minimum distributions (RMDs) from ages 72 to 75 in 2023, permits rollovers from 529 accounts to Roth individual retirement accounts (IRAs), enhances qualifying longevity annuity contracts (QLACs), and more.
Aligning your portfolio with your goals
Individuals may have different methods for funding their lifestyle in retirement, whether that’s growing their portfolio, maintaining or spending some of their principal. For those who are spending principal, consider a dynamic spending strategy or protected income to meet current and future spending needs, says J.P. Morgan Asset Management. The research projects healthcare spending may increase in retirement but decrease in other categories such as food and beverage, apparel, and services in retirement.
While the 4% rule has long been a popular practice when considering retirement withdrawals, the research recommends retirees consider dynamic approaches that adjust over time.
Take a long-term view on inflation and the markets
The research analyzes how staying invested during a market downturn may lead to a better retirement outcome, as some of the market’s best days can occur very close to the worst days. For example, the second worst day of 2020—March 12—was followed by the second best day of the year.
Missing the ten best days over the past two decades reduced the annualized return by almost 50%; missing the top 40 days resulted in a negative annualized return on the original investment, finds J.P. Morgan Asset Management.
Additional findings from the research can be found here.
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