Events beyond anyone’s control can adversely affect the retirement savings plans of even the most careful savers. Here are three potential money messes that may be inevitable and unavoidable, but by controlling your response, you can minimize their potential damage to your investment portfolio.
An increase in taxes
No matter what your political standpoint, it is highly likely that taxes will increase in the immediate-medium future. If (when) this happens, don’t use investment funds to cover the extra cost. The best way to deal with a tax hike is to either cut your spending (so you have extra funds to pay with) or increase your income. If you take money out of savings (or decrease the amount you save), your tax bill will hurt you this year and every year in the future as you lose out on potential income.
An increase in market volatility
This often goes together with the above, because the government raises taxes to bolster its coffers in the case of economic turmoil. While volatility isn’t intrinsically bad, it can hurt you badly if you react to it poorly and sell at the wrong times.
If you find that the ups and downs of the market are causing you worry, consider selling your more volatile assets, including stocks, ETFs, mutual funds, and commodities. Volatile assets are only suitable for long-term investors who can stomach volatile markets in the hopes of long-term appreciation.
Continued low interest rates
The reason for low interest rates is that the government wants to make its borrowing easier. However, greed encourages people to make the most of this situation by buying higher risk assets in order to compensate for low rates – and there isn’t always a happy ending here. So watch out. If you’re dependent on fixed income, you may have to adjust your spending.
If you’re careful with how you react, you can possibly avoid the potential financial messes that may occur over the coming months.
Douglas Goldstein, CFP®, is the Director of Profile Investment Service, Ltd., which specializes in helping people who live in Israel with their US dollar assets and American investment and retirement accounts. He helps olim meet their financial goals through asset allocation, financial planning, and using money managers.
Published March 9, 2015.