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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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Infographics

5 Key Questions Investors Have About Inflationary Environments

This infographic explores questions on today’s inflationary environment as the economy faces persistent price pressures.

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Inflationary Environment

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5 Key Questions on Inflationary Environments

What does a changing inflationary environment mean for financial markets, and how could this impact investors?

While there are no clear answers, the above infographic from New York Life Investments looks at key questions on inflation and the potential implications looking ahead.

1. What Are the Main Factors Driving Inflation?

Often, investors closely watch core inflation since it doesn’t factor in volatile energy and food prices. In September, core inflation rose 0.6% from the previous month while headline inflation, as represented by the Consumer Price Index, increased 0.4%.

DateCore InflationHeadline Inflation
Sep 20220.6%0.4%
Aug 20220.6%0.1%
Jul 20220.3%0.0%
Jun 20220.7%1.3%
May 20220.6%1.0%
Apr 20220.6%0.3%
Mar 20220.3%1.2%

Source: Bureau of Labor Statistics, 10/13/22.

Earlier in the pandemic, surging second-hand car prices and supply-chain distortions were factors driving up inflation. But as dynamics have shifted, rising services costs, including housing, have played a significant role.

Along with these factors, a strong labor market is adding to price pressures. Nominal wages increased 6.3% annually in September, after hitting almost 7% in August, the highest in 20 years.

For this trend to reverse, unemployment levels may need to rise and interest rates may need to increase to cool an overheating economy.

2. What is the Effect of Fiscal Stimulus on Inflation?

In response to a historic crisis, the U.S. government allocated over $5 trillion in fiscal stimulus. The Federal Reserve released research that suggests that the fiscal stimulus contributed to 2.5 percentage points in excess U.S. inflation.

Specifically, the fiscal stimulus affected supply and demand dynamics, stimulating the consumption of goods. At the same time, the production of goods didn’t increase, which elevated demand pressures and price tensions.

As the short-term implications begin to unfold, the longer-term structural effects of record stimulus remain far from clear.

3. How Do Interest Rates Impact Inflation?

When inflation is running high, the Fed often hikes interest rates to cool an overheating economy.

Consider how in February 1975 there was a 17% difference between core inflation and real interest rates, an instance when the Fed got “behind the curve”. This shows that the real rate is far below the core inflation rate.

Sometimes, this prompts the Fed to raise rates to combat inflation. After several rate hikes, inflation fell to 4% by 1983, bringing the real rate and core inflation closer together. The table below shows when this gap rose to the double-digits between 1974 and early 2022:

DateCore InflationReal RateDifference
Oct 197410.6%-0.5%11.1%
Nov 197411.0%-1.5%12.5%
Dec 197411.3%-2.8%14.1%
Jan 107511.5%-4.4%15.9%
Feb 197511.9%-5.6%17.5%
Mar 197511.3%-5.8%17.1%
Apr 197511.3%-5.8%17.1%
May 197510.3%-5.1%15.4%
Jun 19759.8%-4.3%14.1%
Jul 19759.1%-3.0%12.1%
Jan 198012.0%1.9%10.2%
May 198013.1%-2.2%15.3%
Jun 198013.6%-4.1%17.7%
Jul 198012.4%-3.4%15.8%
Aug 198011.8%-2.2%14.0%
Sep 198012.0%-1.1%13.1%
Oct 198012.2%0.7%11.6%
Dec 20215.5%-5.4%10.9%
Jan 20226.0%-6.0%12.0%

Source: Peterson Institute for International Economics, Federal Reserve Bank of St. Louis, 03/14/22. The real policy interest rate is the Federal Funds Rate minus Core Inflation over 12 months.

In January 2022, this gap reached 12%, hinting towards further interest rate action from the Fed.

Over the last 11 tightening cycles since 1965, six resulted in soft landings and three resulted in hard landings. Whether or not the recent tightening cycle will result in a hard landing, also known as a significant decline in real GDP, remains an open question.

4. How Long Will Inflation Last?

From the vantage point of 2022, the direction of inflation is as complex as it is uncertain. Below, we show where inflation may be headed in the near future based on analysis from the Federal Reserve.

 2022P2023P2024P
PCE Inflation5.4%2.8%2.3%
Federal Funds Rate4.4%4.6%3.9%

Source: Federal Reserve Board, 09/21/22. Reflects median projections for PCE Inflation and the Federal Funds Rate.

By 2024, inflation is expected to fall closer to the 2.0% target amid higher interest rates. What other key factors could influence inflation going forward?

 2023 Projection
U.S. Real GDP Growth1.2%
Interest Rates4.6%
Housing Price Growth-10.0%
Unemployment Rate4.4%

Source: Federal Reserve Board 09/21/22, Morningstar, 08/07/22. Interest rates represented by the Federal Funds Rate. Housing Price Growth represented by median U.S. home prices.

A combination of slowing GDP growth, higher interest rates, decreasing housing prices, and higher unemployment could potentially dampen inflation leading into 2023.

5. What May Lessen the Impact of Inflation On My Portfolio?

During inflationary periods, value stocks have tended to perform well, based on data from Robert Shiller and Kenneth French. In fact, value stocks saw nearly 8% annualized outperformance over growth during the 1970s and over 5% outperformance during the 1980s.

Similarly, tangible assets like commodities and real estate have tended to weather these periods thanks to their ability to increase portfolio diversification and stability across economic cycles. For instance, between 1973 and 2021, commodities have averaged 19.1% during inflationary periods while real estate assets averaged 5.0%.

The Big Canvas

Generally speaking, periods of high inflation over history are quite rare. Since 1947, the average U.S. inflation rate has been 3.4%.

Inflation (1947-2021)Percentage of Time Spent
Below 0%16%
Between 0 and 5%57%
Between 5 and 10%20%
Above 10%7%

Source: CFA Institute, 07/19/21.

Against a changing environment, investors may consider balancing their portfolios with more defensive strategies that have been historically more resistant to inflation.

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Infographics

A Visual Guide to Stagflation, Inflation, and Deflation

In this infographic, we show the key differences between stagflation, inflation, and deflation and how they impact the economy and investors.

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A Visual Guide to Stagflation, Inflation, and Deflation

Today, high inflation and slowing economic growth have contributed to stagflation worries.

As of August 2022, the U.S. inflation rate has risen to 8.3%, above the central bank target of 2%. Yet unlike the last period of stagflation in the 1970s, unemployment—a key ingredient for stagflation—remains low.

In this infographic from New York Life Investments, we show the key differences between stagflation, inflation, and deflation along with the broader economic implications of each.

Main Features of Inflationary Environments

What are the main characteristics of each inflationary scenario?

 Economic GrowthInflationUnemployment
StagflationSlowsIncreasesIncreases
InflationIncreasesIncreasesDecreases
DeflationSlowsDecreasesIncreases

The key markers of stagflation are weak growth, persistent inflation, and structural unemployment—meaning that high unemployment levels continue beyond a recession.

In a stagflationary scenario, inflation expectations continue to rise each year. This can happen when inflation stays too high for too long, enough for expectations to shift across the economy. This was the case in the U.S. in the 1970s, until the Federal Reserve fought inflation with steep interest rate hikes.

Here’s a closer look at some of the main causes of each scenario and how they’ve historically impacted households and businesses.

1. Stagflation

The term stagflation is the combination of ‘stagnation’ and ‘inflation’.

The primary causes include the expansion of the money supply feeding into higher inflation, as well as supply shocks, which can drag on economic growth.

During periods of stagflation, consumers spend more on items such as food and clothing, while earning less—reducing their purchasing power. Less purchasing power can eventually cause people to buy less, leading to falling corporate revenues, which can ripple across the economy.

Case Study: 1970s Stagflation

The stagflation of the 1970s saw inflation, as measured by the Consumer Price Index, increase from 1% to 14% between 1964 and 1980.

Price pressures, driven by skyrocketing energy prices in the 1970s, contributed to a sharp economic downturn. By 1980, unemployment reached 7.2%.

YearAnnual
Inflation Rate
Unemployment Rate
(December)
Annual
GDP Growth
19641.3%5.0%5.8%
198013.5%7.2%-0.3%

In response, the Federal Reserve raised interest rates as high as 20% in 1981. Soon after, inflation sank to 5% by 1982 and unemployment levels improved.

2. Inflation

Inflation is the rise in the price of goods and services across the economy. Broadly speaking, low and stable inflation is associated with periods of economic growth and low unemployment. It can be driven by rising consumer demand.

The expectation of predictable inflation allows consumers and businesses to prepare for the future, in terms of both their purchases and investments.

Case Study: 1990s-2000s

Over the 1990s and 2000s, the U.S. saw relatively low and stable inflation.

Rapid global population growth, the absence of oil shocks, and expanding global trade contributed to falling costs across industries. Between 1990 and 2007, inflation averaged 2.1% compared to 8.0% during the 1970s as price pressures became less volatile.

YearAnnual
Inflation Rate
Unemployment Rate
(December)
Annual
GDP Growth
19905.4%6.3%1.9%
20072.9%5.0%2.0%

Today, several central banks adhere to a 2% inflation target to ensure prices remain stable and predictable.

3. Deflation

Deflation is the fall in prices of goods and services in the economy.

In many cases, its main causes are demand shortfalls, reduced output, or an excess of supply. For households, spending may stall as consumers wait for prices to fall. In turn, declining prices may lead to a lag in growth for businesses.

Sometimes, deflationary periods raise concerns of slower economic growth. However, supply-driven deflationary periods may be associated with lower prices, raising real incomes and boosting output as exports become more competitive.

Case Study: 1930s Great Depression

Prior to WWII, deflationary episodes were more common than today. One prime example is the Great Depression of the 1930s, when real GDP fell 30% between 1929 and 1933 and unemployment spiked to 25%.

YearAnnual
Inflation Rate
Unemployment Rate
(December)
Annual
GDP Growth
1930-2.7%8.7%-8.5%
1933-5.2%24.9%-1.2%

Tightening monetary policy contributed to this environment. In fact, between 1930 and 1933, the U.S. money supply contracted roughly 30%, while average prices fell by a similar amount.

Historical Asset Class Performance

Which asset classes have historically tended to perform well across different types of inflationary environments?

Average Real Annual Total Returns
(1973-2021)
GoldilocksDisinflationReflationStagflation
U.S. Equities16.1%8.4%14.6%-1.5%
U.S. Treasuries4.3%8.1%-2.0%0.6%
U.S. T-Bills0.8%1.7%0.0%0.4%
Commodities0.4%-5.6%21.0%15.0%
Gold-2.5%1.3%-1.1%22.1%
REITs18.1%3.5%14.0%6.5%

Defensive assets like gold and commodities have historically performed well during stagflationary periods, with average returns of 22.1% and 15.0%, respectively.

Meanwhile, U.S. equities have typically performed well during moderate inflation, or ‘goldilocks’ environments, characterized by falling inflation and rising economic growth.

Both U.S. equities and Treasuries have shown the strongest real returns in deflationary or ‘disinflationary’ periods of slowing growth and inflation, at over 8% returns on average each.

Understanding Different Inflationary Environments

Today’s inflationary period is jarring for investors after an extended period of low and stable inflation. With this in mind, the economy has historically cycled through different types of inflationary periods.

While central banks aim to influence price stability and employment through monetary policy, investors can influence their portfolio by adjusting their asset allocation based on where the inflationary environment may be heading.

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