With the abnormal levels of economic uncertainty we are encountering right now, you’re probably already feeling wary. Financial markets are notably unsteady and inflation continues its record rise. Today we turn our attention to a number of sneak thieves reaching into your savings.
With the abnormal levels of economic uncertainty we are encountering right now, you’re probably already feeling wary.
Even the official inflation update isn’t easing concerns much. For July 2022, inflation accelerated at an 8.5% rate. That’s about half a point less than June, but inflation has been running hot since January 2021. It’s still taking a big bite out of our incomes.
So not much to cheer about on the inflation front yet, contrary to what some market optimists might choose to focus on.
The yield curve between 10-year and 2-year treasuries is currently inverted by 0.48%, which is the highest it has been for 40 years. Since an inverted curve has reliably signaled the last six recessions, it’s nearly guaranteed another one will be underway soon. (No matter how much a handful of “experts” and staff at the White House try redefining the word “recession.”)
On top of the uncertainty with food, gas, and energy prices, I saw this summary of the emotional impact of our economic situation:
Along with material security, many Americans are losing their sense of control over their economic fate. When stock markets are declining quickly, almost no amount of work can keep retirement savings from falling, swallowing up months and years of sacrifice. If you’re a homeowner, knowing that your house is losing value comes with a special sense of helplessness.
The piece went on to use “loss aversion” to explain why any economic recovery will have to be substantial to have a notable impact:
Kahneman and Tversky calculated a “loss aversion ratio” of 1.5 to 2.5, meaning you would have to gain $15 to $25 to neutralize the mental pain of losing $10.
In other words, it hurts about twice as bad to lose as it does to win.
Nobel laureate Daniel Kahneman and the late Amos Tversky developed and refined the loss aversion metric.
And it does seem to accurately describe the deep-in-your-gut sickness you feel when you see a big drop in your 401(k) balance. Sometimes, loss aversion can drive people to make bad investing decisions. (Savers are often their own worst enemies.)
We aren’t always our own worst enemies, though! There’s a terrible trio of external forces that conspire to siphon your IRA dry…
The three thieves
If the economic burden that inflation and uncertainty is placing on retirement savers weren’t enough, these are fundamental obstacles every American must overcome.
Here’s how Kiplingers recently summarized them:
1. Taxes – “Most people don't take taxes in retirement into consideration as much as they should. If they have sizable amounts of money in pre-tax accounts, as many do with traditional 401(k)s, that money is going to be taxed when withdrawn. Required minimum distributions (RMDs) at age 72 can cause tax problems if the issue is not addressed ahead of time.”
In addition to accounting for withdrawal and RMDs, savers should keep in mind that the tax laws change almost every year. From one year to the next, this little “thief” can change in a way that could rob savers of their hard-earned retirement dollars.
2. Risk – “Ask yourself: Do you think we could go through another financial crisis like we did in 2008? A big downturn could happen at some point, and if it does, how much would you lose? More specifically, how much could you afford to lose? Whatever that number is, you need to be comfortable with it.”
While it can be challenging to follow this bit of advice, there are alternatives you could learn about that can help hedge against some of the risk in uncertain times.
3. Investment mix and diversification – “Bank-type products including savings accounts, money market accounts and certificates of deposit (CDs) won’t lose money, but they’re probably not going to grow very well. Another type of tool is stock market-based accounts. They can grow very well and are used for long-term growth. But they’re probably not going to be safe.”
No matter how you slice it, the stock market is quite uncertain right now. So if you’re holding stocks, Kiplingers suggested you reconsider whether that’s really the right choice for your goals.
Concerns about excessive market risk and inadequate diversification bring to mind one of the time-honored safe haven investments…
Striking a balance between safety and growth
During times of uncertainty in the markets, investing some of your hard-earned dollars into historical safe-haven investments like physical gold and silver are worth considering. Precious metals like gold and silver allow you to diversify some of your assets as you see fit, could protect against a major market crash, or guard against the Federal Reserve’s determination to totally destroy the purchasing power of the U.S. dollar. (Gold specifically has an excellent historical track record.)
Another way to insulate your savings from some of these risks? Inflation-resistant investments may help you compensate for four-decade-high inflation and preserve the purchasing power of your retirement savings.
I strongly encourage you to educate yourself! After all, it’s up to each and every one of us to ensure our financial plans are on target. Whatever you choose to do, don’t wait too much longer. By the time you see the lightning, it’s too late to run from the storm.
Peter Reagan is a financial market strategist at Birch Gold Group. As the Precious Metal IRA Specialists, Birch Gold helps Americans protect their retirement savings with physical gold and silver. Based in the Los Angeles area, the company has been in business since 2003. It has an A+ Rating with the BBB and hundreds of satisfied customer reviews.
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