Inflation is rising. Home prices are falling. Oil and stock prices are volatile. Could this be a good time to ramp up your retirement savings? You might be surprised at the answer.
Some 16% of survey respondents said they have increased the amount they are saving as a result of the economic downturn. Of course, you could infer from this finding that 84% haven’t increased their retirement savings. But in our complex and competitive world, it’s not unusual for the minority to know more than the majority. Why would anyone put more money toward retirement now, when the outlook is uncertain? Here are three reasons.
You will still need to retire. No amount of economic volatility can interfere with the aging process. There’s only one way to stop aging, and most people would like to see it occur after a long retirement. Although you might tell yourself that you’ll work as long as you have to, someday you may not be able to continue to earn an income, most likely because of poor health or obsolete skills. Even if you want to keep working past the normal retirement age, it’s best to be prepared for the possibility that you might be unable to do so. Economic uncertainty is not going to make preparing for retirement any easier, so it follows that uncertainty is no reason to back down from your retirement goals.
Retirement might be more expensive than originally expected. Inflation ranks among a retiree’s worst enemies. It dilutes spending power and reduces investment returns. Although the United States has experienced relatively low inflation for the several years, we’ve seen a resurgence in the past year. Our government has an agency (the Federal Reserve) charged with keeping prices stable, but it’s far from certain that the Fed will always be able to help manage inflation. If anything, rising inflation is a call for retirement investors to redouble their efforts.
Securities prices may be lower. Warren Buffett, perhaps the most successful investor in U.S. history, once said, “Investors should rejoice when markets fall.” What he meant was that investors like lower prices because they can buy more for their money. But what to buy is the unspoken key to understanding Buffett’s comment. Simply buying something that has recently fallen in price is not a recipe for success. Buffett also said, “Price is what you pay. Value is what you get.” When the financial markets are down, the reasons may be unrelated to the value of individual securities. After you identify promising investment opportunities through careful research and selection, the decision to buy may boil down to a matter of timing. Timing becomes more important during times of price volatility because waiting might help you obtain a better price. Investments seeking to achieve higher returns also involve a higher degree of risk.
When economic conditions become less favorable, it’s usually a good sign to pay more attention — not less — to your retirement portfolio. It may put you in a better position to gain an advantage from current conditions and help ensure that you continue making progress toward your long-term financial goals.
