Jack Howley Explains How Macroeconomic Considerations Play Into Retirement Planning

When planning for retirement, many people understand that they should put more money into savings and diversify their portfolios. These relatively small moves can make a huge difference in whether a person saves enough for retirement, but often they are not enough to ensure that they can keep an equitable standard of living.

Retirement planning may require a fresh approach. Understanding macroeconomic considerations could help future retirees allocate their investments properly and maximize their chances of living a comfortable lifestyle.

Jack Howley, a well-known personal and corporate wealth protection advisor and entrepreneur, examines how macroeconomic concerns can affect a person’s retirement portfolio and how investors can use these principles to their advantage.

Examples of Macroeconomic Principles

Macroeconomics as a subset of economic considerations covers such large-scale movements as overall economic growth, full employment, and price stability. Macroeconomics measures overall economic activity within a country and around the world. Income, output, inflation, and business cycles all play into macroeconomics.

The Microeconomic Approach to Retirement

Most current retirement advice falls into the microeconomy category, concerning the retiree activities only. Retirees are continually encouraged to save more money. Incentive programs like tax-deferred savings accounts help to stimulate nest eggs and increase investment in the economy.

During normal economic times, savings can be equated with investment. Households may want to obtain risk-free investments like bonds hoping for future returns. However, during recessions, the interest rate is almost zero. There is no incentive for the average retiree to make these investments.

Applying Macroeconomic Principles to Retirement

Many financial protection experts like Jack Howley believe that taking a macroeconomic approach to retirement planning provides a more forward-looking and less reactionary method for growing wealth.

The economy as a whole impacts retirement savings. This is the key aspect of the macroeconomic approach to retirement savings. When the economy does well, retirement investments also do well. This is especially true when looking at the stock market. A rise in real estate prices is also good for many investors’ portfolios.

Tying retirement investments to the macroeconomic view can be tricky, but investment experts have assembled a method with which to do so.

Drivers for Investment Returns

Three primary factors drive investment returns. Most of these can be explained through macroeconomic principles:

The first is economic growth. Growth-sensitive assets are affected by economic expansion. They may flounder when the economy is weakened. Public and private equities, as well as real estate and commodities, fall into this category.

The second category is interest rates. Current central bank policies affect interest rates. When interest rates rise, they have the effect of dampening future cash flow. Investments that rise when interest rates are falling include global inflation-linked bonds.

The third example is inflation. An inflation-sensitive asset does not adjust its value if price levels are on the rise. Inflation levels do cause some investments to rise.

How to Correlate Retirement Savings and Macroeconomics

One of the most important ways to connect retirement savings to the macroeconomic view is by choosing assets that are both correlated and uncorrelated to the performance of the economy as a whole.

For example, some assets may be positively correlated with increased economic performance, while others may have a negative correlation. A negative correlation means that when the economy as a whole goes up, these investments go down and vice versa.

The classic example of uncorrelated assets is the difference between stocks and bonds. Stocks go up when the economy goes up. Bonds tend to go up when the economy goes down. This is because bonds are a lower-risk investment vehicle that appeals to people when they feel that their retirement income is in jeopardy.

Balancing risk in a portfolio means choosing pairs of investments that are less correlated with one another. This forms the conventional wisdom between choosing stocks and bonds.

Different types of assets may be correlated in other ways. For example, a physical asset like gold or real estate may move in the opposite direction when compared to stocks. This is especially true during periods of high inflation.

Analyzing Assets in Terms of Correlation

Experienced financial advisors who are interested in working with macroeconomic principles work with statisticians to create charts of how asset prices have changed in relation to each other. Pairing assets results in a number that marks their correlation. Creating a correlation matrix of this type means that advisors can easily see which pairs of assets should be picked up.

The Macroeconomy and External Events

Political and other macroeconomic events can interfere with retirement savings by impacting income and living expenses. These include changes to Social Security, tax law changes, inflation, or recessions. It is best to hedge against these events by diversifying a portfolio as much as possible and avoiding having all of a person’s assets tied to the performance of the economy as a whole.

While an investor cannot control for these factors, planning can help to head off the worst of their effects. Keeping an eye on future tax and Social Security law changes is an excellent way to help protect against these problems in a portfolio.

Expanding Portfolios Based on Macroeconomic Factors

Investment strategies using macroeconomic factors are highly diversified in risk and reward. Weighting macroeconomic factors equally can help to maximize the benefits of diversification.

Market conditions tend to affect most investments, and it is a good idea to choose some investments that go up when the economy goes down. Pairs of investments that are negatively and positively correlated with economic growth help to ensure that any one sector of the economy falling flat will not mean a significant drop in a person’s retirement savings.

Final Thoughts

Jack Howley recommends that all retirement investors begin looking past the microeconomic considerations of wealth planning, including increased savings and spending pattern changes, and toward macroeconomic methods of adjusting their portfolios. Working with the economy’s strengths and weaknesses presents a long-term view that could be beneficial for the individual investor.