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How to Build a Crash-Proof Retirement Plan

Cash-strapped Americans are increasingly turning their retirement savings into piggy banks to make ends meet. That’s almost always a terrible idea, and can wreck your retirement plans – unless you do this…

How to Build a Crash-Proof Retirement Plan
AP Photo/Horst Faas

From Peter Reagan at Birch Gold Group

After several months of inflation that continues to accelerate above 5%, some retirement savers could be left wondering: When will inflation ease?

That’s a completely understandable question to ask. In fact, CNBC’s Jessica Dickler reported that some Americans saving for retirement are feeling the “bite” of inflation, and they might be starting to give up on the idea of it easing anytime soon:

About 71% of Americans said they feel their paycheck is not able to keep up with inflation, a report by Experian found.

In addition, 29% of respondents said they expect they will barely be able to make ends meet this month and roughly the same number predicted that their spending will likely exceed their budget in the months ahead.

“People are struggling to figure out how to meet those challenges,” said Rod Griffin, a senior director at Experian. “It’s a huge concern.”

Now, we know from the work Wolf Richter has done on the “wealth effect” that inflation inordinately affects the majority of Americans, what we might think of as the less-wealthy 90%. “Less-wealthy” is a bit of an exaggeration, though, because it includes everyone whose household net worth is $775,000 and below.

With that in mind, it might not surprise you to learn that even people making 2 ½ times the median income are struggling to get by: “Half of workers earning more than $100,000 said they have little to nothing left over at the end of the month” according to a LendingClub poll.

Now, if you find yourself barely getting by, living paycheck-to-paycheck for a while, that’s not necessarily the end of the world. Especially if you have a strong head-start on saving for retirement. The whole point of starting early and saving as much as you can is to help ride out the rough economic times, like we’re seeing now.

The situation gets more complicated when we find ourselves struggling to make ends meet, and then the economic situation deteriorates…

It seems like that economic deterioration is happening before our eyes.

Should you find your own finances in disarray at a bad time, you’ll be very tempted to tap into your retirement savings to stay above water. And that makes sense.

However, don’t forget, when the economy is falling apart, that’s when prices for most assets are at their lowest. Using retirement savings to pay the bills for a few months could absolutely devastate your financial future.

(It’s called “sequence of returns risk,” which we’ve written about before.)

“Make sure you have enough cash so you don’t have to sell your [investments] to have cash,” recommends David Peterson, Head of Wealth Planning at Fidelity investments. Peterson recommends cash because it’s by definition pretty much the least volatile investment. The downside of cash has been pretty stark recently – a guaranteed loss of 8.5%, thanks to inflation.

Maybe instead of keeping your emergency fund in cash, you could consider inflation-resistant investments instead?

Why worry – won’t returns make up the difference?

For decades, we’ve been told to invest in stocks if we ever want to retire. We’ve been given 401(k) retirement accounts (if we’re lucky) and a handful of assets to choose from. Maybe that used to be enough. But if you’re hoping that historical returns will make up the difference for you, Vanguard has some bad news:

Historical returns are no guarantee of future returns. Focusing only on historical returns could make investors overly optimistic about the future.

In other words, all projections indicate that future returns will be much worse than historical returns for at least the next ten years.

So where can we do to protect ourselves against this bleak outlook?

Start here to build resilience into your financial plan

This round of inflation isn’t likely to be going away any time soon. It’s also quite likely that another round of rising inflation will happen at some point in the future. If an economic downturn happens, that makes any inflation that much worse.

But the good news is savers can build resilience against the upcoming storm into their retirement plan. One place to start is building an emergency fund.

Over at The Balance, the general “rule of thumb” they offer for an ideal emergency fund is as follows:

According to a popular rule of thumb, you should aim for between three and six months’ worth of expenses. But in some circumstances, you may want to save up to 12 months’ of living expenses.

> Some experts recommend a smaller emergency fund while paying off debt.

> If your job is secure and you don’t have a lot of expenses, you may be able to save less. If your job isn’t secure and you have more expenses, you may need to save more.

> Focus on developing a habit of saving, rather than the big target number.

That last point is good advice, because having a habit of saving keeps you saving.

Once a retirement saver gets the ball rolling on an emergency fund, the next starting point to consider is deciding where to invest it.

A safer way to tap into retirement savings

At Forbes, Jamie Hopkins described one surprising place to consider stashing your emergency fund, the Roth IRA.

Roth IRAs are a really interesting emergency fund vehicle because your contributions into a Roth IRA go in after tax, and you can access them at any point without negative tax consequences – from both the income tax and penalty tax standpoints.

You really have two parts of Roth IRAs: first, you have the tax-free investment growth portion (but this is only tax-free if you meet certain holding period requirements and triggering events); then, if you need to tap into Roth IRA funds for an emergency, you could tap into the other part – your contributions – without facing an additional tax penalty.

Here are the current I.R.S. guidelines concerning Roth IRAs, so you can see the holding requirements and triggering events that Hopkins refers to. And if you do decide that an IRA is right for you, here is another type of IRA that lets you buy physical safe-haven gold and silver for your emergency/retirement fund. Unlike most other investments, gold tends to rise in price when the skies are darkest. That one consideration makes physical gold an excellent option for an IRA-based emergency fund.

But don't diversify with physical gold or silver in the hopes of making a quick buck. Instead, enjoy the security and peace of mind you’ll gain, because you’ll be able to start building some resiliency back into your retirement plan.

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