Climate change may be reaching into your Retirement Plan. As evidenced by the extreme weather patterns sweeping across the globe, our climate appears to be in flux. Could an unpredictable climate have an impact on retirement planning, both present and future. What does climate change mean for your retirement plan participants? Simply put, it means participants should give consideration to the impact that their portfolios are positioned to weather a climate-based storm.
MarketWatch recently published an article with some recommendations when incorporating climate change into retirement planning. These may be helpful to keep in mind and share with all plan fiduciaries and your plan’s financial advisor, as well as with participants directly:
Climate change may impact investment returns: Higher inflation may eat away at returns, lowering the value of investment portfolios. Returns on individual stocks may also decline as fossil fuel behemoths are forced to do business differently. This, while other companies feel the economic impact of higher costs and lower profits. Although the S&P 500 has averaged 6-7% real returns after inflation, retirement plan participants should not count on those kind of returns going forward. There’s no guarantee of better performance over time, but one option is considering ESG funds as a complement to your plan’s existing investment lineup. It may offer an opportunity for participants to invest in funds that strive to make a positive impact when it comes to environment, social, and governance strategies.
Plan for things to be more expensive: Crushing heat waves have impacted crop failures, supply chain disruptions, severe droughts, and damage to infrastructure. This makes goods and services more expensive to produce and transport, and those costs will be passed on to consumers. The same goes for taxes. This means today’s workers must plan to save even more for retirement so they can afford rising prices and taxes in the future.
Consider avoiding areas vulnerable to rising sea levels, wildfires, and extreme heat: Chances are, areas like the Southwest may one day become unlivable due to these conditions. Federal buyout programs may help people move from these areas, but given the potential for disaster, those opportunities may not be all that abundant. Insurance companies are also dropping people’s homeowners insurance due to the risks. That trend will likely grow, so retirement plan participants should plan accordingly.
Get properly insured: Remind participants to carry proper insurance for the areas in which they live, be they vulnerable to flooding, wildfires, or earthquakes – even if insurance costs are high. If they can’t afford the insurance coverage, it may be time to consider living elsewhere. Also, insurance only covers rebuilding in the same spot, not relocating to a safer place, so you should make sure they’re aware of those risks as well.
Migrate to areas that are climate-resilient: This is especially important for those planning for early retirement. Encourage participants to consider moving to areas with livable temperatures, adequate rainfall, and no long-term rising sea level threats. Although catastrophes and natural disasters can happen anywhere, remain vigilant. Living in places where catastrophes are less likely does help. Participants can increase the odds of their being able to stay put without losing their homes or endangering their lives.
Make lifestyle modifications that can stop contributing to climate change: People tend to use more energy than necessary. Reducing consumption can help limit one’s carbon footprint. This might include reducing energy usage for heating and cooling, cutting back on travel, and trimming back unnecessary expenses – even eating less meat and consuming more in-season produce. Cutting back on consumption isn’t only good for the planet, it’s good for people and their finances, too.
Climate change is likely going to have a bigger impact on our lives going forward, including retirement planning. Encourage your participants to consider climate change. Participants’ should re-think their overall retirement planning. Making smarter choices today is good for the future.
Managing Editor at 401kTV
Steff C. Chalk is Executive Director of The Retirement Advisor University, a collaboration with UCLA Anderson School of Management Executive Education. Steff also serves as Executive Director of The Plan Sponsor University and is current faculty of The Retirement Adviser University.