If you’re like many Americans, you’ve probably left the gas station in high spirits recently. Over the last 12 months, the benchmarks for oil and gas prices show a 50% decline (1). While this is good news for Baby Boomers and Pre-Retirees worried about inflation in retirement, know this: there’s a negative for every positive.
Despite the savings at the pump, the recent decline in gas prices could spell trouble for many Americans preparing for or already in retirement. To illustrate this, consider how recent price decreases has affected the Teacher’s Retirement System of the City of New York, one of the nation’s largest pension programs. From June 2014 to June 2015 educators and other pension workers saw $135 million invested in oil and gas get erased from its books (2).
If you think pension investments may not represent your exposure to oil & gas related price changes, consider this: 40 of the companies represented in the broad S&P 500 index are energy companies (3). This means that many ETFs and Mutual Funds linked to the S&P have also been affected by recent losses. Bruce Picard, the lead portfolio manager for MassMutual RetireSmart Funds said:
“Most major pension plans or retirement plans, unless they have a very different approach than most everybody, we’re going to have some exposure here (2).”
So where does this leave those preparing for retirement?
The first thing to analyze is what your exposure to oil and gas really is. Despite the dizzying losses mentioned in the New York Teacher’s Pension, oil & gas represented just 1% of their total holdings, meaning that diversification helped hedge against potentially massive losses (2).
The second thing to consider is what matters most when it comes to retirement planning. As a financial professional who is more intent in planning for income in retirement than purely pursuing growth strategies, I believe that income in retirement is of paramount importance. There are many different tools that can accomplish the goal of generating income in retirement, but the thing I want to stress is that when your needs change, your approach to planning needs to adapt as well. Preparing for retirement is all about saving and investing for growth. But when we transition into retirement itself we need to consider vehicles that are intended to efficiently distribute income in a reliable way to give us paychecks we can count on.
I hope you’ve enjoyed reading how a perceived positive (low gas prices) can have negative consequences (potential for losses). If you’re interested in exploring some of the ways I help my clients focus more on income solutions than pure growth strategies, I’d like to invite you to reach out to me. I’ll share with you some of the ways I can make these strategies work for you and your family’s plan.
(3) Source: http://www.barchart.com/stocks/sp500.php