Much has changed over the past two years which means it’s time to take a fresh look at the economic environment and seriously question conventional wisdom. Here are four important trends that merit careful consideration.
1. Inflation. As stated in our May 6th blog, inflation is back and likely to be a factor for some time. Inflation presents us with a growing risk of declining purchasing power. Is your portfolio designed to offer some measure of protection from inflationary pressures? For some investors, it may be necessary to increase overall equity exposure. For others, it may be appropriate to increase allocations to commodities such as energy, metals, real estate, and inflation-protected bonds. If you’re not sure, it’s time to have a conversation with your wealth manager.
2. Longevity. People…many people…are living far longer than ever, often deep into their eighties and nineties. Said differently, this makes the risk of outliving your money a very real possibility if you don’t properly plan. Here’s a surprise – we think it makes sense to plan on living to 100! Exposure to equities and other growth investments over your lifetime can help create the growth of principal necessary to help ensure a growing income stream. Don’t forget that longevity demands that healthcare needs also be addressed – whether through long-term care or dedicated (and significant) savings.
3. Taxes. Yes, we received a reprieve from higher taxes via a temporary extension of the Bush tax cuts, but prudence suggests that we plan for higher taxes over the longer-term. Is your portfolio tax-smart? Should you consider a Roth conversion? Is after-tax investing a better approach for your situation? Not sure? Talk to your wealth manager.
4. College Education Expenses. Many individuals put their retirement years at considerable risk by saving too little for retirement while simultaneously funding their children’s educations too generously. We live in challenging times, thus the need to challenge conventional wisdom. It’s OK to tell your children that they need to participate in funding their education.
Remember – risk is relative! These trends are real and here to stay. Ignore them, and you may find yourself at risk far beyond anything you previously imagined. Your wealth manager should be able to help you anticipate and plan for these risks.