5 Key Risks to Your Retirement Portfolio Growth
5 Key Risks to Your Retirement Portfolio Growth
Those seeking to accumulate assets for a blissful retirement (and those who continue to invest during the golden years) face domestic and global challenges.
Most are beyond your direct control.
The next to last one we discuss ahead is within your power.
However, forewarned is forearmed, and that’s one of the primary goals of Retirement Revolt Substack.
These 5 key risks are:
Key Risk 1: The Fiscal Integrity of the US Economy
Key Risk 2: Persistent inflation and high rates
Key Risk 3: Geopolitical tensions
Key Risk 4: Public Policy
Key Risk 5: Asset Allocation
Together, you and I will thrive despite these risks.
For now, let’s review each of these risks so you are better informed about these negative trends impacting our nest eggs, and so you can devise a plan forward to confront and defeat them.
Key Risk 1: The Fiscal Integrity of the US Economy
As The Hill newspaper reported in February 2024: “The U.S. federal government’s on an unsustainable fiscal path. And that just means that the debt is growing faster than the economy. So, it is unsustainable. I don’t think that’s at all controversial,” Powell said when asked if the national debt is a danger to the economy.
The debt is growing faster than the economy?
The US government does not live within its means like you must do.
The deficit – the difference between what the IRS collects and the politicians spend in Washington – is surging.
The New York Times recently reported that the U.S. Debt is headed toward $56 trillion over the next 10 years, citing Congressional Budget Office [CBO] projections showing “a grim fiscal backdrop ahead of tax and debt limit fights.”
Why?
Because there are 2 things, few are speaking about or know about.
First, the debt ceiling is coming up for renewal in January.
Second, the 2017 Trump Tax Rate Cuts are set to expire at the end of 2025, raising taxes on everyone.
Now you can see why I say the fiscal integrity of the US is stressed.
Politicians on both sides of Washington have spent so much money, first with Trump in response to COVID-19 – a national emergency—and now with the current Administration's wild spending on dubious green energy projects, which has ignited the contagion of inflation.
The current Administration has really poured on the spending, doubling the deficit in 2023 alone.
As the Times continues: “The budget deficit in 2024 is projected to be $1.9 trillion, up from a forecast earlier this year of $1.6 trillion. Over the next 10 years, the annual deficit is projected to swell to $2.9 trillion. As a share of the economy, debt held by the public in 2034 will be 122 percent of gross domestic product, up from 99 percent in 2024.”
2020 was the last time the entire US budget hit $3.1 Trillion, and now the CBO – which often underestimates economic impacts – that the yearly shortfall will equal that entire budget just 4 short years ago.
In an environment of high interest rates to try to tame inflation, federal interest costs (now more expensive because of these high rates) are now higher than defense spending.
As cited in the Wall Street Journal article in June 2024, “Will debt sink the American Empire?”: “Historian Niall Ferguson recently invoked what he calls his own personal law of history: “Any great power that spends more on debt service (interest payments on the national debt) than on defense will not stay great for very long. True of Habsburg Spain, true of ancien régime France, true of the Ottoman Empire, true of the British Empire, this law is about to be put to the test by the U.S. beginning this very year.”
There is no sign anywhere that the politicians in Washington are going to spend less.
Then, add the duo of Social Security headed for a 21% haircut in 2033 (just 9 years away), and Medicare is funded until 2035, and you can see how the USA's financial situation is reaching a danger zone.
That is, the country's financial system is severely stressed, and no change seems to be in sight.
The intellectually bankrupt news reporting framing the debate as a “shutdown of the government” is so dishonest, misinformed, and completely wrongheaded as the country’s finances deteriorate.
More than the US government could shut down if the adults do not get a handle on spending.
If spending is not controlled, the growing debt and interest payments threaten the fiscal integrity of the entire country.
On August 1, 2023, Fitch Ratings downgraded the U.S. credit rating from AAA to AA+1—the second time in the nation’s history that such a downgrade occurred because of expected fiscal deterioration over the next three years, a high and growing general government debt burden, and erosion of governance relative to higher-rated peers.The toxic combination of elevated inflation and high interest rates with a heavy and growing debt burden is a volatile cocktail for those in retirement and saving and investing for retirement.
Key Risk 2: Persistent inflation and confusing Fed rate reductions
Everything from food to houses has seen dramatic increases and those price jumps are never going to return to pre-Biden levels.
So, while journalists and other commentators cheer on the slight dip in inflation, the damage is done.
Walmart, Home Depot, and Target are not going to reduce prices.
While prices have soared, American households have suffered wage cuts of 3% since January 2021 because of inflation.
The American dream – home ownership – is out of reach of many because even though demand is low, home prices are still rising because high mortgage rates are deterring potential sellers from listing their homes, keeping the supply of homes on the market lower than normal.
This crushing of discretionary income has left many without extra funds to save for retirement for tomorrow when they can’t afford to live today.
Some argue the Federal Reserve was late to the party in taming rising inflation, and now after two rate cuts, inflation remains persistent.
Rate cuts while the US deficit and debt are soaring, and supposedly, the US economy is strong would be an admission that the economy is weak and sliding toward a recession.
Now, the short, mid, and long-term damage of uncontrolled federal spending disrupting Americans' daily lives is inescapable to the fiscal integrity of the world’s largest economy.
Is the US economy too large to fail?
Inflation is not going to magically disappear, and the last serious bout of inflation under Democrat President Jimmy Carter took interest rates of 19% to finally calm and a change of presidents in the 1980 election.
Now Federal Reserve Chair Jerome Powell is caught in a confusing rate reduction cycle while inflation remains high – a mismatch of economic policy.
Normally, when the coast is clear – that inflation is dropping – the Fed cuts rates – but inflation has remained sticky.
The inflationary toll of every day Americans was one of the reasons the economy helped elect Donald Trump as president again last November.
Key Risk 3: Geopolitical tensions
This headline sums up 2024 forward.
In the June 12, 2024 article entitled, World Order is in a Downard Spiral," from the National Interest journal: "The international system is well into its most challenging period since the years that led up to the Cuban Missile Crisis, as the liberal world order gradually erodes."
The MidYear Outlook Report by JP Morgan Bank detailed worries about the deterioration of global security and suggested investors look for defense stocks to cash in.
The frailty of the US Commander in Chief has translated into weakness abroad in his foreign policy.
At the APAC Summit in Peru in early November, President Biden stood in t he back row among Asian Rim leaders with Chairman Xi Jinping in the front row for all the cameras to see.
The current coterie of foreign policy advisers in the White House and in the bureaucracy is following in the path of the failed Obama Presidency to secure America’s interest, protect its allies, and keep the revisionist powers of China, Russia, Iran, and North Korea in check.
Many of them served in that Administration.
One poignant reminder of the peril the United States faces is the realm of nuclear weapons.
The United States has not built a nuclear warhead (the W88) since the late 1980s, while China and Russia modernized their forces.
China has expanded the acceleration of its nuclear forces. The guess-timate number is around 500 ICBMs.
Russia is nearing the completion of its multi-decade-long nuclear modernization program with approximately 4,380 nuclear warheads for both strategic and non-strategic forces.
North Korea’s Hwasong-15 missile, which is believed to have a range of 13,000km, putting all of the continental US in its sights. Pyongyang has also launched its own spy satellite – technology it regularly shares with the Islamic Republic of Iran.
Iran, a state sponsor of terror and foe of the US, is nearing nuclear breakout, and the current Administration in Washington – like Obama, too – is fine with that.
Obama’s Secretary of State John F. Kerry bragged about the US lagging behind its enemies in the nuclear realm, as cited by CSIS:
This promise of no new testing, new designs for warheads, or new military capabilities was also highlighted in the U.S. statement to the Nuclear Non-Proliferation Treaty (NPT) Review Conference in 2015, when John Kerry said, “We have pledged not to pursue new nuclear warheads or support new military missions or military capabilities for the weapons that we do have, and we haven’t tested a nuclear weapon in 23 years.”
The United States has been the stabilizer of relative global peace since the end of World War II.
However, the current Administration does not view the US as a positive force in global affairs.
The Quad (as discussed more in Episode 5) – China, Russia, Iran, and North Korea – who agree and want to diminish US power are doing whatever they please.
China threatens to seize Taiwan.
North Korea menaces Japan and South Korea, both US allies.
Iran will soon achieve nuclear breakout and has the ballistic missiles to deliver them to Tel Aviv and beyond.
The only question is whether Iran will announce its entry into the nuclear club or continue to play strategic ambivalence to keep its enemies guessing.
Iran, North Korea, and China are assisting Russia with its war against Ukraine.
The US is facing self-afflicted financial difficulties and its own internal social and political problems, which only embolden its enemies abroad.
The global order is decaying because the US is not constructively engaged on the side of the “good guys.”
9/11 proved that the US Mainland is not impervious to foreign attack, but many Americans have forgotten that day.
The Quad is serious about achieving its foreign policy objectives at the expense of the US and its allies, and the tepid pushback from Washington so far has not deterred them – an ominous development going forward.
President-elect Trump inherits a volatile and perilous international scene - the very one that also could negatively impact your retirement security.
Understanding the impact of geopolitical shifts on stocks, bonds, and other investment allocations is crucial to building your retirement nest egg.
Thankfully for you, you’ve got the Retirement Revolt Substack to help you build retirement security!
Key Risk 4: Public Policy
The 2024 US presidential election is finally over and for the second time in American history, a candidate who had another term between his two terms was elected – Donald J. Trump.
For the first time since 1988, a Republican won both the popular vote and the Electoral College helped by sweeping all 7 so-called “swing states.”
The economy, inflation, and immigration remain the top issues.
In March 2024, a CBS-YouGov poll shocked some political observers, revealing that 2/3 of registered voters qualified the Trump-era economy as “good” while 38% said the same about Biden.
The Wall Street Journal in June reported that the U.S. economy grew 1.4% in the first three months of the year, according to the government’s latest estimate of first-quarter annual growth. That was the slowest quarterly growth since the spring of 2022.
The runup of inflation from profligate government spending, which began under Trump because of the COVID response and blossomed under Biden, has made Americans poorer.
The case of economic risk was covered in key risk #2 earlier.
President-elect Trump inherits an economy still mired in inflation and the price of everyday goods still more costly than when his term ended in 2020.
The American dream – home ownership – is out of reach for many with elevated prices and interest rates from the profligate government overspending in Washington.
In a finer point – Bank of America does not see any recuperation for the housing market until at least 2026. Really, 2 more years?
A boomlet on Wall Street proceeded the Trump win and a wait-and-see posture prevails ahead of his promised tax rate cuts, de-regulation regime, and more energy production.
The US economy is still a persistent threat to investments you hold in your portfolio.
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Key Risk 5: Asset Allocation
According to most financial experts, asset allocation ranks among the critical decisions for investors.
The vaunted Vanguard investment company says: Your financial goals, the time frame in which you want to accomplish those goals, and your risk tolerance are the 3 factors to having the amount of money you need when you need it.
Your choice of stocks, bonds, and cash (including equivalents) significantly impacts investment outcomes.
Asset allocation creates the structure for an investor’s portfolio and outlines a plan for precisely determining where to allocate their funds.
Staying invested in the market to let your money work for you and accumulate into a sizeable nest egg is an unwritten rule for investment success.
Risk management, individual goals, time horizon, and balancing risk and reward are factors that impact your investment strategy.
A lengthier conversation about asset allocation follows in subsequent blog posts.
Conclusion
These 5 key risks to the growth of your retirement nest egg are:
Key Risk 1: The Fiscal Integrity of the US Economy
Key Risk 2: Persistent inflation and high rates
Key Risk 3: Geopolitical tensions
Key Risk 4: Public Policy
Key Risk 5: Asset Allocation
Learning how to mitigate risk in your portfolio depends on being forewarned and forearmed of domestic and international affairs.
Now you know about 5 key risks to help protect your investments, so you have the money you need to live out your golden years blissfully.
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