Market Volatility's Effect on Retirement Planning

Summary

WSJ Your Money Briefing

Episode: Market Volatility's Effect on Retirement Planning

Date: April 2, 2018
Host: J.R. Whalen
Guest: Joe Reddy, Head of Wells Fargo Institutional Retirement and Trust

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Overview

This episode explores how current market volatility is affecting retirement planning, especially among investors approaching or already in retirement. Host J.R. Whalen sits down with Joe Reddy from Wells Fargo Institutional Retirement and Trust to analyze recent survey data, investor sentiment, and the impact of recent tax law changes. Despite ongoing market fluctuations, the discussion reveals a surprising level of optimism and tolerance for correction among retirement planners.

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Key Discussion Points & Insights

Investor Optimism Amid Market Volatility

• Resilient Confidence:
  • Recent Wells Fargo and Gallup polling indicates that most investors remain optimistic about both maintaining household income and reaching investment goals over the next five years, despite volatile markets.
    • Joe Reddy (03:02): “The index in and of itself is at an all-time 17-year high... 7 out of 10 investors... said that they're very confident about maintaining their household income and achieving their investment objectives over the next five years.”

Tolerance for Market Corrections

• Normalization of Volatility:
  • Over half of surveyed individuals stated they could tolerate a 10% or greater market correction within a year, indicating a “new normal” of correction tolerance.
    • Joe Reddy (03:42): “Over half have said they could not only tolerate a correction at 10% or more, but... 45%... said they're concerned about volatility, but that's actually down from 64% just a year ago.”
  • Investor concern about volatility is actually decreasing, and a significant portion still see it as a good time to invest.
    • Joe Reddy (03:42): “6 out of 10 say right now it's a good time to invest broadly... 5 out of 10 said it's a good time to invest in stocks.”

Lessons Learned from Past Market Cycles

• Staying Invested Pays Off:
  • Exposure to past crises and recoveries has instilled resilience; the experience has taught many not to panic and stick to their long-term plans.
    • Joe Reddy (04:42): “What investors have realized in retirement [is] that the market will work in their favor in the long run... don't have an emotional knee jerk reaction. There's a lot of resilience to stay invested according to your plan and don't have knee jerk reactions.”
    • He adds: “It's more about I can't control the markets, but let me zero in on what I can control.”

Mixed Feelings About Tax Law Changes

• Uncertainty Reigns:
  • Investors are unsure if the new tax law will benefit them personally, with a notable split in sentiment:
    • 35% think it's mostly good,
    • 13% think it's mostly bad,
    • 24% say it's somewhat positive,
    • 28% are unsure.
    • Joe Reddy (05:31): “There's just this uncertainty as a result of the tax reform around how it might affect them personally.”

Gaps in Retirement Tax Planning

• Limited Awareness of Strategic Opportunities:

  • Only a minority are considering after-tax strategies, despite historically low tax rates for many.

    • Joe Reddy (06:20): “Only 12% said that they would actually consider an after-tax strategy, which is really surprising when you think about the tax rules...”
    • Many lack understanding of differences in IRA types and the importance of tax diversification.

  • Tax Diversification Concept:

    • Joe Reddy (06:20): “We talk about tax diversification just like you would asset allocation, which is maybe have a mixture. Right. Don't put 100% in one bucket or the other.”

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Notable Quotes & Memorable Moments

• On Resiliency and Market Conditioning
  • Joe Reddy (04:42): “There's a lot of resiliency, resilience to stay invested according to your plan... and people that have done that have benefited.”
• On the New Normal of Market Correction Tolerance
  • Joe Reddy (03:42): “I refer to this as the new normal, which is the correction tolerance, if you will.”
• On Investor Blind Spots About Tax Strategy
  • Joe Reddy (06:20): “I think it's a lot about, I don't understand how to manage that or how to talk about that or how to think about that because I don't know what future tax rates are going to be.”

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Timestamps for Key Segments

• [02:27] – Introducing discussion on retirement planning under market volatility
• [03:02] – Survey findings: Investor optimism at record highs
• [03:42] – Correction tolerance and decreasing concern about volatility
• [04:42] – Lessons from past market cycles, benefits of staying invested
• [05:22] – Tax law changes: Uncertainty over personal impact
• [06:04] – Retirement savers’ knowledge gap on tax diversification and IRAs
• [07:05] – Episode wrap-up

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Episode Takeaways

• Despite significant market volatility, most retirement savers remain optimistic and are more comfortable than ever tolerating market corrections.
• Investors have learned to focus on long-term planning and to avoid knee-jerk reactions to short-term market movements.
• There is still a substantial knowledge gap regarding tax-efficient retirement planning, particularly in the area of Roth accounts and tax diversification.
• The recent tax law has introduced uncertainty rather than decisive strategic changes for investors.

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Summary prepared for listeners seeking actionable insights on retirement planning under current market conditions, with special focus on behavioral and tax planning considerations.

Transcript

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[J.R. Whalen]

Money in Market Stories from the Wall street journal. I'm J.R. whalen in New York. How are those with a sharp eye in planning for retirement handling the current market volatility? We'll have some answers in a moment, but first these money items you should know the Wall Street Journal moneybeat team says natural gas, a historically turbulent market that's crushed experienced traders in large hedge funds, is having its quietest period in 22 years. The volatility of the past couple of years in energy has disappeared, suggesting an end to the turbulence brought on by a global supply glut in natural gas, which has been prone to severe swings. Three month realized volatility is at its lowest since 1996, and volatility in U.S. crude futures also reached its lowest since late 2014. Meanwhile, the Journal Markets team says despite the recent pullback in tech stocks, investors

[Host / Interviewer]

are not ready to break up with

[J.R. Whalen]

the market's technology darlings. Stock ratings among analysts and brokerages have largely held steady for big tech firms even as their shares have slumped, a sign the tidal wave of bad news hitting the industry hasn't destroyed confidence in popular stocks. Analysts cite Big tech's strong earnings outlook and dominance across industries from retail to social media, as well as the likelihood that any additional regulations lawmakers impose will take time to implement. And the Journals heard on the street team says after strong corporate earnings results in the first quarter of 2018, investors should expect a string of disappointments and and as such, keep an eye on their portfolios. Analysts polled by Thomson Reuters estimate first quarter profits for companies in the S&P 500 will be up an estimated 18.5% above the year earlier level. But while earnings will still get a boost later in the year from some effects of the tax cut, there are too many variables, including more capital spending, higher labor costs, a weaker economy or trade war to bank on double digit growth for the whole year. This is your Money Briefing from the Wall Street Journal. Welcome back everybody.

[Host / Interviewer]

Investing and planning for retirement is a multitasking activity, measuring your own lifestyle and financial obligations against the current and projected market climate. So how optimistic are those planning for retirement in the face of today's market environment. Joe Reddy is the head of Wells Fargo Institutional Retirement and Trust and he joins us to discuss. So Joe, Wells Fargo and Gallup recently polled investors and I suppose the conventional wisdom would seem to be that investors and those planning for retire would be unsettled by the volatility we've seen in the market. But that really hasn't had as much of a pronounced effect.

[Joe Reddy]

That's right, J.R. it has not borne out. In fact, the index in and of itself is at an all time 17 year high. That's in September of 2000, right before the dot com sort of bubble, if you will. And what we find is 7 out of 10 investors when we talked to them said that they're very confident about maintaining their household income and achieving their investment objectives over the next five years. So there's still a lot of optimism in the market.

[Host / Interviewer]

I thought it was interesting in the survey that more than half of those surveys said they could tolerate a 10% or greater market correction over the course of a year. And they seem to be, it's almost like a new brave new world that they can weather that sort of tumultuous

[J.R. Whalen]

environment in the market.

[Joe Reddy]

Right. In fact, I referred to this as the new normal, which is the correction tolerance, if you will. To your point, over half have said they could not only tolerate a correction at 10% or more, but the interesting part, 45%, when we asked about volatility, said they're concerned about volatility, but that's actually down from 64% just a year ago. So optimism continues to pour. To add to that, JR6 out of 10 say right now it's a good time to invest broadly in the financial markets. And more specifically, 5 out of 10 said it's a good time to invest in stocks. So they're very positive about the overall projection market going forward.

[Host / Interviewer]

You know, financial people I talk to that have been in the market and observing the market for decades say they have not seen an environment where stocks are such an attractive destination for money. They haven't seen it in 50 years. And it is really amazing that a lot of these retirees and those planning for retirement have lived through recessions. They have lived through ups and downs and they're still confident about the market.

[Joe Reddy]

They are. I think what we've learned during this long run, whether it's 17 year high, we had sort of the correction in 0809 and then the great run up here, if you will, in terms of valuations, I think what investors have realized in retirement that the market will work in their favor in the long run. And so I think there is a little bit of this sort of conditioning that's gone on, which is to say, you know, don't have an emotional knee jerk reaction. There's a lot of resiliency, resilience to stay invested according to your plan and don't have knee jerk reactions. And people that have done that have benefited. And I actually think that messaging over time has actually sunk in. And so it's more about I can't control the markets, but let me zero, zero in on what I can control. Right. Other factors beyond that.

[Host / Interviewer]

But the benefits of the new income tax law is where we see a mix of opinions. Many aren't very optimistic about personally enjoying the benefits of the new tax law. I thought that was interesting.

[Joe Reddy]

It's very interesting. In fact, 35% say it would be mostly good for them, 13% say mostly bad, 24% say somewhat positive, and 28% are unsure. Right. So I think there's just this uncertainty as a result of the tax reform around how it might affect them personally. And we think about it in the retirement plan business as what I'll call asset location. Right. How should I, how should I diversify my assets? Right. And 25%, though, are only aware of the Roth difference between traditional pre tax and not.

[Host / Interviewer]

You know, that was another thing I noticed here was particularly significant in the survey. A majority said the tax law is unlikely to cause them to change their investment strategy. And it seems to be the result of a blind spot they have as far as their knowledge of various IRAs.

[Joe Reddy]

Right. In fact, it's very interesting you bring that up. Only 12% said that they would actually consider an after tax strategy, which is really surprising when you think about the tax rules where a lot of people say, hey, today tax rates may be my lowest effective rate ever for a long period of time. Whether you're a young worker and you're sort of climbing the wage scale or an older worker that says, you know, my effective tax rate may be as low as it's going to be. And so this, I think it's a lot about, I don't understand how to manage that or how to talk about that or how to think about that because I don't know what future tax rates are going to be. And so we talk about tax diversification just like you would asset allocation, which is maybe have a mixture. Right. Don't put 100% in one bucket or the other. And I think this tax planning issue becomes real. When you get to the retirement side of the equation.

[Host / Interviewer]

All right. That's Joe Reddy, head of Wells Fargo Institutional Retirement and Trust, joining us here in our studio. Joe, thanks for being with us.

[Joe Reddy]

JR thanks for having me.

[Host / Interviewer]

And that's your money briefing. I'm JR Whalen in New York for the Wall Street Journal.

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