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A Visual Guide to Planning for Retirement

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NYL Retirement Planning

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How Retirement Planning Today, Can Ensure Freedom and Stability Tomorrow

When it comes to retirement planning, millions of Americans across different generations are finding it difficult to feel secure.

This is evidenced by the fact that only 54% of Baby Boomers have a retirement strategy in place. For younger generations such as Millennials, this falls to as low as 31%.

Thankfully, it’s never too late to start thinking about retirement. In this infographic from New York Life Investments, we’ve put together a straightforward overview that covers the various aspects of the retirement planning process.

How Much Should You Save?

Although this is one of the most frequently asked questions, it doesn’t come with an easy answer. That’s because retirement planning isn’t just about dollars saved, it’s also about income.

The following table lists a number of factors that could affect the level of retirement income you might need:

FactorDescription
LifestyleYour desired lifestyle will have a large impact on your required level of income.
Hobbies, vacations, and other pursuits can be a significant expense.
Housing needsRetirees often find themselves needing less space.
Selling your home and downsizing is a common method for increasing cash flows.
Medical needsMedical expenses can arise unexpectedly and be a large drain on savings.
The average American aged 65+ spends roughly $11,000 a year on medical needs.*
InflationInflation can erode the purchasing power of your retirement income, and highlights
the importance of picking the right investments to counter this effect.

*Source: U.S. Department of Health

After estimating your retirement income, the next step is figuring out how to achieve it. Here’s how a savings plan might look, based on two assumptions: (i) your retirement income is equal to 70% of your current annual income, and (ii) you are able to generate an annual return of 7%.

Annual salaryAnnual retirement incomeRequired savingsMonthly contributions
(20 years until retirement)
Monthly contributions
(25 years until retirement)
Monthly contributions
(30 years until retirement)
$50,000$35,000$777,778$1,480$955$635
$75,000$52,500$1,166,667$2,230$1,435$955
$100,000$77,000$1,711,111$3,270$2,100$1,395

The key takeaway from this table is that the earlier you start saving for retirement, the lower your monthly burden will be.

It’s also important to remember that the 70% retirement income goal was simply used as a benchmark—your own retirement strategy will ultimately be guided by your unique needs.

The Importance of Financial Assets

In the previous example, our second assumption was that you were able to earn an annual return of 7%. Achieving this typically requires the use of financial assets like stocks and bonds, which have the potential to grow your wealth much faster than a typical savings account.

For example, as at March 15, 2021, the national average interest rate offered by a savings account was 0.04%. Compare this to the S&P 500, which has generated an average annualized return of 13.9% between 2011 and 2020. The S&P 500 is a stock market index that consists of the 500 largest publicly-traded U.S. corporations.

Issues become apparent when we take a closer look at who actually owns stocks.

U.S. Families by WealthPercentage of Families with Equity Exposure
Top 10%90%
Middle 50-90%70%
Bottom 50%31%

Source: Federal Reserve

With only 31% of families in the bottom 50% having exposure to stocks, many Americans are missing out on a powerful tool for growing their wealth. This highlights the importance of investor education, particularly when thinking about retirement.

Retirement Planning Accounts

Retirement accounts are another important tool that many Americans are not using to their advantage. For example, just 50.5% of Americans own a retirement account, while 98.2% own transaction accounts (checking or savings).

Here’s a simple overview of two retirement accounts that most Americans have access to.

Traditional IRA

A traditional IRA (Individual Retirement Account) provides tax benefits to help you prepare for retirement. It can be opened online or in-person through various banks, brokerage firms, wealth managers, or trading platforms.

Contributions to this account may reduce your taxable income for that given year, but these assets will be locked until retirement. Once retired, any untaxed income would be taxed upon withdrawal, ideally when you are in a lower marginal tax bracket.

Traditional 401(k)

A traditional 401(k) is typically offered through your employer and offers similar tax benefits as an IRA. Contributions into a traditional 401(k) reduce your taxable income, but in this case, they are automatically taken from your payroll.

An added benefit of the 401(k) is that your employer will usually match some or all of the contributions you make.

Roth IRA and Roth 401(k)

The Roth variants of these accounts follow a similar concept as their “traditional” counterparts, but flipped around. This means that contributions are taxed, while withdrawals are tax-free.

Ultimately, the decision to use either a Roth or traditional account will depend on your financial position, and can be a great topic to discuss with a professional advisor.

Feeling Secure

While everyone has different goals for retirement, the need for financial security is shared by all.

It’s been estimated, however, that the average American has a retirement savings shortfall of nearly 10 years. Also known as longevity risk, this dilemma refers to the scenario where retirement savings and income are unable to support you for the rest of your life.

With this in mind, it’s never too late to take control of your future and put a plan into place.

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Visualized: The Economic Benefits of a Green Recovery

A green recovery is projected to boost global GDP by 1.1% annually, along with saving 9 million jobs. What opportunities does this present for investors?

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Visualized: The Economic Benefits of a Green Recovery

After years of technological advancement, many renewable energy sources are now more efficient than traditional sources of energy.

Thanks to their falling prices and scalability, a green recovery, which centers on worldwide funding and policy support for green energy alternatives, is gaining strong momentum.

This infographic from New York Life Investments unpacks how a green recovery will benefit both the economy and investor portfolios.

What is a Green Recovery?

A green recovery is the intention of allocating the unprecedented global wave of public spending, pent up over the course of the 2020 pandemic, exclusively towards investment in sustainable systems to support:

  • The creation of millions of jobs
  • Improved productivity
  • A structural decline in greenhouse gas emissions (GHG)

Green Recovery: The Economic Benefits

It is projected that nine million jobs per year will be created or saved over the next three years in a green recovery, along with 1.1% added in global economic growth annually.

Let’s look at two reasons why a sustainable recovery is gaining traction:

  1. Lower costs in energy spending
  2. More jobs created

To start, a sustainable recovery would involve 2% of U.S. GDP invested in low carbon energy. Compare this to current U.S. energy spending, which stands at roughly 6% of GDP—sitting at near lows. In fact, in the past, energy spending in the U.S. has reached as high as 13% of GDP.

Secondly, for every $1 million investment in renewable energy, more than twice as many jobs are created per category than in traditional energy. For instance, 7.5 jobs are created in the wind energy industry versus 2.2 in oil & gas.

Per $1 Million InvestmentTypeJobs Created
Renewable EnergyEnergy Efficiency7.7
Wind7.5
Solar7.2
Traditional EnergyCoal3.1
Oil & Gas2.2

Source: World Resources Institute, 07/28/20

With this in mind, let’s take a look at how investors can take advantage of a sustainable recovery across three industries.

1. Renewable Energy

Historically, energy demand has sharply rebounded after major economic shocks.

Following the Spanish Flu, energy demand plummeted over 15%—but rebounded by almost 25% the year after. Similarly, in the years that followed the Great Depression, World War II and the Global Financial Crisis, energy demand spiked.

In 2020, energy demand growth hit a 70-year low, created by the largest absolute decline ever. If history repeats itself, energy may be poised for a substantial demand increase.

On top of this, renewables have become significantly cheaper and scalable in recent years. Solar energy is a prime example. It is now one of the most affordable sources of electricity. In fact, the price of energy from new power plants—vital sources that generate energy for society—has changed significantly over the last decade.

Energy TypePrice per MWh (2009)Price per MWh (2019)Price % Change
Coal$111$109-2%
Solar Photovoltaic$359$40-89%
Onshore Wind$135$41-70%
Gas (combined cycle)$83$56-32%

Source: Lazard Levelized Cost of Energy Analysis via Our World in Data, 01/12/20

In 2019, over 50% of new global power capacity came from solar photovoltaic and wind power.

2. Transportation

Globally, as electric vehicle (EV) sales have accelerated, so have public chargers, illustrating a new infrastructure opportunity for investors. In 2019, there were 1 million public chargers built worldwide. Since 2014, public chargers in Europe specifically have more than doubled to over 200,000.

Year# of Global Electric Vehicles
2012110,000
2013220,000
2014400,000
2015720,000
20161.2M
20171.9M
20183.3M
20194.8M

At the same time, economies are planning for a wave of green transport investments.

Italy, for instance, plans to invest $33 billion in sustainable mobility as part of its $231 billion green recovery plan. Meanwhile, Germany is investing $6 billion in the electrification and modernization of its rail and bus system. Interestingly, high-speed rail uses 12 times less energy per passenger than airplanes or road transport trips under 500 miles.

Like renewable energy, electric vehicles, high-speed rail, and modern transport infrastructure are all central to the new chapter in sustainable investment.

3. Low-carbon Technology

Finally, you can’t talk about a sustainable recovery without net-zero emissions, where all emissions created are also removed from the atmosphere.

In recent months, net-zero targets have increased substantially. In January 2020, 34% of all global emissions were covered by net-zero targets. By March 2021, this reached 50%. Decarbonization will play a critical role in reaching net-zero targets.

Crucially, net-zero emissions can be achieved through the following decarbonization options:

  • Carbon capture: Chemical absorption and the injection of CO2 into depleted reserves
  • Nuclear energy: Produces energy through nuclear reactions
  • Storage & utilization: Improved electricity grid storage
  • Renewable innovation, and others: Includes hydrogen, batteries, and scaling renewables

Even in the wake of the pandemic, global investment in decarbonization topped half a trillion dollars in 2020, 9% higher than in 2019.

New Turning Point

COVID-19 is radically reshaping the sustainable investment landscape.

In 2020, nearly 25% of all U.S. stock and bond mutual fund net inflows went into sustainable funds. By 2025, as many as half of all investments are projected to be ESG-mandated in the United States. From modern infrastructure to low-carbon tech, sustainable investments present many opportunities for investors.

Supported by lower costs and government policies, sustainable investments show potential for promising growth.

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Infographics

Beyond Bonds and Bridges: How to Approach Infrastructure Investments

Global infrastructure needs amount to $94 trillion by 2040. Here’s how to take advantage of infrastructure investments in your own portfolio.

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How to Approach Infrastructure Investments

Infrastructure is essential for our transportation, utilities, and communication needs. In fact, the U.S. government has recently emphasized its key role with supportive spending plans—and infrastructure is entering an investment supercycle.

In this graphic from New York Life Investments, we highlight the growing opportunity in infrastructure investments, and how investors can take advantage through both municipal bonds and publicly-traded infrastructure companies.

Investing in Infrastructure

As infrastructure continues to evolve, there are 3 main themes driving growth.

  • Data growth: Wide-scale tech adoption is increasing our need for digital infrastructure
  • Aging assets: Existing infrastructure is in need of upgrading or total replacement
  • Decarbonization: Climate change is driving demand for more sustainable energy

This presents a large opportunity for investors. Between 2016 and 2040, global infrastructure needs will amount to $94T, or about $3.7T per year.

Investors can access this market through municipal bonds, which are debt securities issued by state and local governments. They can also allocate funds to listed infrastructure companies, which are publicly-traded equities that own or operate infrastructure assets.

Here’s what investors need to know about both types of infrastructure investments.

Municipal Bonds

Traditionally, U.S. infrastructure is defined as big public work projects such as bridges, roads, and schools. About three-quarters of the costs are paid for by state and local governments, with a large portion coming from municipal bonds.

Both taxable and non-taxable bonds offer many benefits:

  • High Credit Quality: While corporate bonds are spread relatively evenly between investment grade and non-investment grade, the vast majority of municipal bonds are investment grade. These ratings have held up well, even during recessions.
  • Low Equity Correlation: Correlation measures how closely the price movements of two investments are related. While other bond categories have moved more in-line with the stock market, taxable municipals have had the lowest correlation. Investors who add taxable municipals to a portfolio may increase diversification.
  • Higher Relative Yields: Taxable municipal returns have been strong relative to other high quality sectors, and comparable to that of corporates.
    Bond categoryYield to worst
    Taxable Municipals2.10%
    Investment Grade Corporates1.70%
    U.S. Aggregate1.10%
    U.S. Treasuries0.60%

    Note: Data as of December 2020. Yield to worst is the lowest potential yield that can be received on a bond without the issuer actually defaulting.

    Amid low or even negative interest rates, this is especially important.

Infrastructure Companies

After municipal bonds are issued, governments use these funds to hire both public and private companies to build, maintain, and upgrade infrastructure. These companies have distinct advantages, such as high barriers to entry and consistent demand.

Of these companies, 360 are publicly-traded with a total value of $4.1 trillion. What benefits do public (listed) infrastructure companies offer?

  • Attractive historical returns: Listed infrastructure companies had higher returns than global equities over the 20-year period from 2000-2020.
  • Income potential: Over the last 20 years, income has accounted for about half of public infrastructure’s total return. This is partly due to stable and resilient cash flows.
  • Lower volatility and downside risk: Historically, listed infrastructure has had less risk than traditional equities and other real asset classes.
    Asset classStandard deviation Downside capture ratio vs global equities
    Listed Infrastructure12.9544.8%
    Global Equities15.14100.0%
    Global REITs17.3580.9%
    Energy Master Limited Partnerships38.25209.4%

    Note: Standard deviation and downside capture ratios are in USD over a 5 year period from Jan 2016-Dec 2020 using quarter-end data.

    For example, listed infrastructure only declined 45% as much as global equities during market downturns from 2016-2020.

An allocation to global, publicly-traded infrastructure companies may help reduce portfolio swings and manage risk.

Infrastructure Investments in a Portfolio

While municipal bonds play a key role in funding infrastructure, it’s companies that build our data centers and maintain our bridges.

Investors can benefit from allocating money to both infrastructure investments.

InvestmentWhere does it fit?Benefits
Municipal bondsCore fixed income allocation- High credit quality
- Low equity correlation
- Higher yields relative to other high quality sectors
Infrastructure companiesGlobal equity or real assets allocation- Income potential
- Attractive historical returns
- Lower volatility relative to equities & other real assets

Ultimately, municipal bonds and infrastructure companies can help investors build a stronger portfolio.

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