Climate Change and Retirement Planning

Retirement Plan Risk

Climate change may be having an impact on retirement planning, both present and future.  What does climate change mean for your retirement plan participants?  Simply put, it means they should incorporate climate change into their retirement plans.

MarketWatch recently published an article with recommendations on how to incorporate climate change into retirement planning.  These points may be helpful to keep in mind as the retirement plan fiduciaries look towards the future.  The topics warrant discussion with your plan’s financial advisor when considering how they might impact participants directly.  Here they are:

Climate change may erode returns: Higher inflation normally reduces the buying power of any returns.  Or, it can eat away at returns, lowering the value of investment portfolios. Returns on individual stocks may also decline.  This can be especially true for companies who engage in businesses concentrated in fossil fuel behemoths.  Regional trends are forcing companies to do business differently.  This is resulting in other companies feeling 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 cannot anticipate those kind of returns going forward.  There’s no guarantee of equal or better performance over time.  Many plan sponsors are struggling with the option of considering ESG funds as a complement to the plan’s existing investment lineup.  The trade-off can mean lower returns in participant accounts.

Plan for things to be more expensive: Crushing heat waves contribute to crop failures, supply chain disruptions, and severe droughts.  Severe cold also results in goods and services being more expensive to produce and transport.  Those costs are normally passed on to consumers.  This means today’s workers must plan to save even more for retirement so they can afford rising prices and potential tax increases in the future.

Stay away from areas vulnerable to rising sea levels, wildfires, and extreme heat: Areas of the U.S. and around the globe may one day become unlivable due to extreme-weather conditions.  Government subsidies may help people to relocate from impacted areas.  Given the potential for disaster, those opportunities may not be all that abundant.  Insurance companies constantly assess known-risks.  This can result in eliminating exposure in geographic regions.  Assessing risk is a normal business process for insurance companies.  Retirement plan participants should plan accordingly.

Get properly insured: Plan participants should always carry proper insurance for the areas in which they live.  This could lead to a natural migration from high-risk locations.  Historically high-risk locations are defined as being vulnerable to flooding, wildfires, or earthquakes.  If homeowners cannot afford adequate insurance coverage, it may be time to consider living elsewhere.  Insurance coverage normally includes rebuilding in the same spot and rarely includes costs associated with relocating to a safer place.

Move to areas that are climate-resilient: This is especially important when planning for early retirement.  Retiring participants should consider moving to areas with moderate temperatures, adequate rainfall and no long-term rising sea level threats.  Although catastrophes and natural disasters can happen anywhere, living in places where they’re less likely will increase the odds of participants being able to stay put without losing their homes or endangering their lives.

Make lifestyle modifications that do not contribute to climate change: People who tend to use more energy should consider reducing consumption.  Doing so 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.  Cutting back on consumption isn’t only good for the planet, it’s good for people and their finances, too!

Climate change is likely to have a bigger impact on our lives going forward, and this includes retirement planning.  Encouraging your participants to consider climate change as a part of their overall retirement planning can help them make smarter choices today.


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