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The old Temptations single, “Ball of Confusion,” from 1970 has an eerily prescient message for us this week. Describing what the world was then reminds us of today:
Cities aflame in the summertime... Fear in the air, tension everywhere, unemployment rising fast… Evolution, revolution... Shooting rockets to the moon, kids growing up too soon. And politicians say "more taxes will solve everything!" While people all over the world shout "END THE WAR."
Conflicts will only continue to escalate aggravated by both COVID-19 fallout and the aftermath of the senseless death of George Floyd.
Policy battles are ongoing and lockdown restrictions are beginning to loosen. But we still have over 40 million Americans out of a job with no reassurance that economic activity will recover swiftly or major market swings will ease this year.
When chaos swirls around us, volatility eventually impacts our financial security. It is during uncertain periods that establishing a financial game plan becomes more urgent. Most informed investors have access to a professional advisor but many Americans do not have this guidance, nor do they have the knowledge or confidence on how to access answers or helpful resources.
So let us review a few critical ideas on how to protect, build savings, and safeguard investments in this unsteady environment for retirement nest eggs large or small.
First: Save wherever you can. Personal savings rates for Americans hit an all-time high of 33 percent last month. While spending decreased by almost 14 percent due to the virus-related halt in business, travel, and leisure activity, boomers have led the way in this trend. They have a strong incentive to build cash reserves as they near retirement years. The point is that today is always a good time to build up a permanent, secure emergency savings stash or contribute to a retirement fund.
Second: Try to avoid withdrawing retirement savings unless absolutely essential. COVID-19 obviously created an abrupt unemployment shock and business disruption for millions,and new legislation now allows drawdowns of up to $100,000. But younger savers can lose out on decades of lucrative, tax-free investment returns if they remove and do not replace funds quickly.
Third: Stay away from leveraged investment products that offer deceptively attractive double-digit returns. A leveraged note uses borrowed money to enhance performance. That does provide big returns but also major losses when things go wrong.
With the current crisis and a presidential election in five months, the markets are guaranteed to be volatile. We are in a historically low interest rate environment with ten-year treasuries yielding 0.65% — which means it would take a saver 111 years to double his or her money. This is a major reason the stock market -- with its higher dividend-yielding companies -- is steadily advancing during an uncertain economic environment. We should, therefore, anticipate unexpected swings and surprises which makes any leveraged product a highly risky game for any average investor.
Fourth: These volatile times present an opportunity to improve financial literacy for yourself and your family. Too many Americans are ill-equipped or simply have not had time to understand the basics of investing and saving.. There is a stream of sites and tools available to make learning about finances easier and more fun for everyone.
Fifth: There are some simple digital tools to use if you want to understand how to build retirement savings or learn how long they can last. These tools range from Personal Capital’s Retirement Planner to Vanguard Retirement Nest Egg Calculator. They ask for a few figures and can provide guidelines to help make saving decisions. Financial professionals work with similar tools and now there is no reason the average investor cannot access these free models as well.
Getting a handle on how to rebuild finances is job number one for American families today. We need to work together to restore faith that more of us can indeed have a secure retirement future.