Five key ways to save and invest for retirement

March 12, 2021

Katherine Roy, chief retirement strategist at J.P. Morgan Asset Management, joins Yahoo Finance to share tips on retirement planning and discuss mitigating longevity risk in retirement.

Video Transcript

JULIE HYMAN: And after the year that we have had, certainly a lot of people's portfolios might be up on the past year if they had an overweight in US stocks, but what do they do now? Katherine Roy is with us now. She's the Chief Retirement Strategist at JP Morgan Asset Management. They just put out their annual report on retirement.

And Katherine, you know, there are certain things I'm sure with retirement remain consistent no matter what. But I am curious what you all had to tweak in terms of your thinking, if anything, after the year that we have had.

KATHERINE ROY: Yeah, I think, Julie, to that point, we have five key themes, the first of which is touching on exactly what you mentioned, that there have been strong returns that hopefully individuals have benefited from. But going forward, that means that that might be lower returns going forward, which is particularly important for people close to retirement who have the greatest wealth at risk.

And we know that one strategy to combat against those lower returns is to be better diversified, but also to make sure that you're investing with cash paying nothing. Being invested is important, but being more diversified is equally as important. Third, we have record savings in 2020. And so there's opportunity, we think, going forward as things normalize to really think carefully about what we didn't miss so that we spend less to save more.

Low taxes won't be in place forever. But we know that they are escalating in 2026 when the Tax Cuts and Jobs Act sunsets, which means that taxes will rise even without any further legislation, which I know is a key concern given the fiscal stimulus, et cetera, that taxes might rise. So now might be the time to think about getting some of that future tax off the table through the use of Roth.

And then last, you know, we're tracking this. But we are curious, with the effects of COVID, will more pre-retirees really re-evaluate their retirement plan and leave the workforce earlier than they may have anticipated? And also with concerns about Social Security and what that might mean, we want to make sure that investors are making good decisions about that Social Security benefit, given how important it is to their retirement income plan.

BRIAN SOZZI: And Katherine, lots of folks, I would say, are concerned right now about really rampant accelerating inflation. As this economy starts to kick back into gear, how could retirees beat this inevitable inflation?

KATHERINE ROY: Well, they need to make sure that they're investing, because cash isn't going to help them at all in that particular question. And so we do see from a diversification perspective making sure that they're well diversified outside of the United States as well, but also using a high yield. Emerging market debt and equity, for example, are important levers to be pulling.

And so we really want to make sure that we're also factoring in behavioral tendencies. We saw that retirees actually pull back and spend less. Now, obviously, that's partially a function of COVID and concerns around their health status. But it does raise the opportunity longer term that as inflation rises, that they think about what spending might they want to trade off to be able to protect their portfolios, particularly if things get volatile again?

MYLES UDLAND: You know, Katherine, as I go through this deck, there are a couple anxiety-inducing tables in here around household income, what the savings rate needs to be, so on, and so forth.

I'm just curious, in your client base, what kind of dynamics you guys have seen, not just in the last year, but over the last several of people maybe being more aggressive in saving for retirement, or younger people starting to understand the benefits of being invested early? How are those kinds of trends playing out?

KATHERINE ROY: Yeah, I think we're definitely seeing millennials being more active savers. And I think an ongoing concern, though, is that they're great savers. But the question is, are they really investing to the degree they need to over the long term and really benefit from the market overall?

I think we're seeing retirees, really, at this point in time where they're making sure that they are maximizing their savings through catch ups. We're seeing lots of interest in health savings accounts to make sure that they are taking advantage of those triple tax advantage status of those accounts to really save for their health care expenses in retirement in the most tax efficient way possible. So you're seeing a real key focus there as well.

JULIE HYMAN: Katherine, as you get millennials, for example, saving more, I mean, this is a generation that's more comfortable with investing in things like cryptocurrencies, and traditionally this is not something that I would guess the retirement industry sort of embraces, but do you have to now, because this is something that clients want?

KATHERINE ROY: You know, I think it's maybe something to consider. But at the end of the day, saving successfully for retirement is driven mostly by that savings behavior. So even with our rate of return reduction across the guide, that was one thing that we did from a preretirement perspective. When we look longer term, we took basically a quarter of a point off of our return expectations.

And really, that impacts people close to retirement, not those farthest away. It's really a story about saving is going to grow their balances. And if they take an appropriate level of risk into a diversified strategy, that's great.

If they want to invest in other things in order to get that return, the main message we want them to be taking away is that investing, systematic investing, regularly doing it, making sure they're saving as much as they can when they have additional income, saving some of the additional income rather than just spending it, which we know is typical in the United States.

And so making sure that they have a well diversified strategy we believe is the best path and the smoothest path to get to a long term successful retirement outcome.

JULIE HYMAN: Katherine, good to see you. Thank you. Katherine Roy is Chief Retirement Strategist at JP Morgan Asset Management.