Friday, February 3

2022, a bad year to retire

A perfect storm threatens the markets and the investment portfolios of workers who, due to age or will, have planned to retire this year.

The Fed’s decision to raise interest rates, high inflation, the tightening of monetary policies and the crisis caused by Putin in Ukraine are producing falls in the markets that weigh down the profitability of the portfolios and it harms, above all, those who will begin their retirement this year and do not have time to recover from these conjunctural falls.

The priority of these investors is now “consolidate the money saved“, point out the experts. Enrique Devesa, a professor at the University of Valencia and a researcher at the IVIE, recommends that they “not withdraw the money invested or, if they need to, withdraw small amounts to allow time for their value to recover.”

An alternative to avoid running out of savings before time is, according to the professor, hiring a annuity, “because with it we are sure that the savings will not end before death”.

Redeemed in the form of income or capital?

Before making any decision, Miguel Angel Menendez, director of the Wealth area of ​​Mercer Spain, advises participants in pension plans to review their average returns, the historical returns obtained and decide how to receive their savings, whether in the form of income or capital, and when to have from them.

“The ideal is to do periodically in the form of income to optimize fiscal investments. Although it is necessary to take into account the possibility of reducing 40 percent of the rights received in the form of capital for those contributions that have been made before December 2016.

Therefore, in Menéndez’s opinion, “a mix between capital and income, considering the returns obtained and the tax advantages, can be a good practice.”

the rule of 4

Another alternative that future retirees have to correctly manage their capital in the retirement stage and avoid spending it before time is to follow the rule of 4 strategy.

It is a formula that allows the saver to calculate how much he can extend his final savings if each year you withdraw a part of it, taking into account the profitability generated by your assets.

It considers the profitability obtained, inflation and the amount withdrawn as fundamental variables. If the sum of inflation and the amount spent annually exceeds profitability, the capital will gradually decrease until it runs out.

Menéndez gives an example: if inflation is 6.5 percent like last year and 4 percent of the capital is withdrawn annually, a 10.5 percent return will be needed so that the money does not disappear.

“Obviously a 10.5 percent annual average return, with the current market situation it is very unlikely that it will be obtained even with weighted portfolios with a lot of variable income,” says the expert.

To delay or not to withdraw?

One dilemma faced by workers whose retirement is imminent and who suffer sharp drops in the profitability of their portfolios is whether or not to delay retirement.

Experts disagree on this point. “The drop in profitability of their portfolios should not influence their decision to retire, because the amount of the public pension is the main income of most retirees,” says Enrique Devesa.

It must be taken into account that the replacement rate in Spain -percentage that the retirement pension supposes on the last salary received in the labor stage- is around 83 percent on average, 20 percentage points more than the average of the OECD countries.

The opposite is the opinion of Miguel Ángel Menéndez, for whom if the moment in which the retirement age is reached coincides with a situation of losses in the financial markets, “the most coherent thing would be to wait for the storm to pass and our savings to recover the previous levels. But of course, our financial situation does not always allow us to wait for the storms to pass”.

Plan the investment

He points out that to prevent this from happening, “we must plan the investment strategy of our portfolios in advance, so that, in those years close to retirement, the investment assets are more conservative at the cost of lower returns.”

Consider that the investment models known as life cycle, “they are ideal for establishing this planning, although they are still little used in Spain”.

They allow the investment strategy to be weighted between fixed income and variable income based on the participant’s age, progressively reducing the most volatile assets and, therefore, with more risk as they get closer to retirement.