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Five retirement planning solutions for 2021

Katherine Roy, J.P. Morgan Asset Management Chief Retirement Strategist joins Yahoo Finance Live to share five retirement planning solutions for investors to implement in the new year and beyond.

Video Transcript

[MUSIC PLAYING]

MYLES UDLAND: All right, well, even if you don't pay attention to financial markets, just about everyone is vaguely aware of what happened in markets this year. We had the crash back in March, and now everything is back at record highs, certainly going to affect how savers and folks who aren't brain broken like us, paying attention to the markets all the time, are thinking about their retirement.

So what should you be thinking about as we head into 2021? For more on this, we're joined now by Katherine Roy. She is the chief retirement strategist at JP Morgan Asset Management. Katherine, thanks for joining the show. I'd love to begin by just kind of talking about how you are thinking about lessons maybe that, you know, savers learned this year and if there's anything actionable from how 2020 played out for people to really think about as we get into the next decade here.

KATHERINE ROY: You know, I think there's a lot of really great things to take out of 2020, as difficult as it's been, some real life experience that we can apply to improve our retirement outcomes beginning in 2021. And the first is the importance of emergency reserves.

So to your point, the market cratering back in March, you know, if people had the need for liquidity, selling and locking in those losses when the market was down more than 30% is really a difficult thing in terms of derailing your long-term retirement plan. And we know that about 4% or so, even though that seems small, for that 4% of DC plan participants who've had to tap their 401k as a result of being affected by COVID, we know over the long-term, if they don't pay that back over the next two to three years, that really can mean a lot less for their retirement once they achieve that or get there.

And so, obviously, the rule of thumb is three to six months' worth of liquidity to be able to weather what life throws at you. But I always like to recommend just getting started. And so, this is a great time, particularly if you're spending less on other things, like, you know, less entertainment, less eating out, those types of things, it's a great time to revisit your emergency reserve fund and make sure that you're making it as most-- the most as it can be. And so, just starting with setting up your paycheck to direct a portion, maybe $25, $50, $100 each paycheck into a savings account is a great way to get started and I think a key learning from 2020.

BRIAN SOZZI: Katherine, what's your best advice to someone nearing retirement that wants to take on more risk and wants to get involved in the stock market? And who has largely missed out on what appears to be the start of this next bull market? How do they go about it?

KATHERINE ROY: Well, we know that there's a lot of cash on the sidelines, particularly in IRA accounts, which are supposed to be long-term investing accounts. And we have about $1 trillion sitting in those IRAs and Keoghs, as well as $11.5 trillion sitting in savings accounts. So there's a lot of cash sitting there, and we know that back to 1990, 66% of the time, the S&P 500 has been positive.

And so, we think, as we look at lump sum investing of that cash, so even if I'm 55 and I have five or more years, we know that three out of four times, over a five-year rolling period, you're going to be better off putting a lump sum of that cash into the market than dripping it, in terms of a dollar cost averaging strategy. So we obviously don't want to take on too much risk because someone close to retirement when their wealth is greatest, that sequence of return risk can be problematic. But we also don't want to be too conservative.

And so, given that cash is paying nothing right now, the estimate is that if you have $100,000, so a big number in cash, the amount of interest you're earning is only $210 a share. And so, what we want to be doing for our retirement is getting that higher return in a balanced way. So lump sum investing where you can into the S&P or into equities can really mean more for your retirement longer term.

JULIE HYMAN: What we've sort of learned from the last year, Katherine, as well is that when you give people extra money, they will save it, right? People who got-- you know, we saw the savings rate go up as people were getting checks from the government. Are we, then, to think that the savings rate tends to be low because people don't feel like they have extra money? So I just wonder, is it a perception issue when you have people who maybe don't feel like they can put away $25 or $50 or $100 extra a month? Or is it really that the people don't have that extra money?

KATHERINE ROY: Well, we know, based upon our view and our analysis of steady earners this year, is that there is room to reduce spending. And we saw that at its peak in April, obviously, with the lockdown, but that's since normalized. And we estimate as we look at through November that steady earners over the course of this year have spent about 5% to 6% less in total, so year over year as we compare this year to last year. And so, we know there's room.

So I know the US consumer has roared back. When we saw that reduced spending in April, it really had return more to normal in June and July. We know they're spending less on services, but that's being crowded out by buying more goods. And so, I guess that the key learning for me here is, you know, there is the ability to sock away more, whether it's an emergency reserve fund, whether it's to save and invest more in your 401k.

And I think this is a really great year to take stock of where have you been spending less. Is there an opportunity to make that a permanent habit? We know it's very difficult to behaviorally change some of those spending behaviors. But being thoughtful going into 2021 and being diligent about where that spending could be reduced to work harder for you over the long term, I think there's a good opportunity to learn from 2020, spending behaviors on that front.

MYLES UDLAND: And, you know, Katherine, finally, certainly, you're talking to clients who are thinking longer term, but the short-term enthusiasm that we see in the markets right now, the animal spirits that are clear with Bitcoin, with the S&P, with electric vehicles, SPACs, all this stuff that is happening right now, does that change the tenor of some conversations where clients are now calling up, and they're really fired up about markets, whereas maybe in the past, that hasn't really been the case? People were still thinking about know what had happened back in 2008.

KATHERINE ROY: Yeah, so if people were able to stick with it through March and have experienced the recovery, I think that's really been positive for their retirement. But when we look, going forward, using our long-term capital market assumptions, I think it still does all come back to the power of diversification and making sure if equity valuations are as high as they are and fixed income is really not paying much in terms of income, that level of diversification needs to be higher, whether it be high yield, emerging market debt, those types of strategies, so that you can really achieve a higher return over that long-term.

So when we look at, going forward over the next 10 to 15 years, you know, a 60-40 portfolio used to be an 8% expected return and then drop to 6%. And using our assumptions going forward, it's now at 4.2%, which really means people need to be saving more, retirees need to be spending less, unless they get a higher return for the same level of risk, taking on some of those more extended asset classes and being better diversified over the long-term.

MYLES UDLAND: All right, Katherine Roy is the chief retirement strategist at JP Morgan Asset Management. Katherine, thanks so much for joining the program today.

KATHERINE ROY: Thank you. Happy holidays.