Time for investors to get 'real' about retirement

Is it too late for retirees to get real? And by that we mean getting real assets into their individual retirement accounts.

Real assets — natural resources, infrastructure and real estate — have had a pretty nice run so far in 2022. High energy and commodity prices, coupled with supply chain disruptions, have sparked long-dormant inflation, causing investors to stock up on tangible assets and the companies that dig or drill for them.

Crude oil, for example, soared 41% from January through June, while the price of heating oil surged 65%. Soybeans and wheat prices grew a respectable 12% and 10%, respectively over the course of the first half of 2022.

While the stronger dollar dulled gold’s luster, the yellow metal still finished flat in the first half. That's not bad, especially compared to the 57% drop in bitcoin, its long-rumored replacement.

Put simply, Americans have thus far spent 2022 buying anything and everything they can get their literal and figurative hands on for fear of paying even more down the road.    

Meanwhile, up in the actual and proverbial cloud, technology stocks got slammed during the first half, with Alphabet, Amazon and Meta (formerly Facebook) falling 25%, 36% and 52%, respectively.

Other equities outside the earth’s oil patches and mining pits didn’t fare much better. The S&P 500 fell 21% over the same period, suffering its worst first half of a year since 1970. Investment-grade bonds, as measured by the iShares Core U.S. Aggregate Bond exchange-traded fund, dropped 11%, notching their worst start to a year in history.

Connect all the dots and one can clearly see why retirees counting on the traditional 60/40 stock/bond split to carry them through their golden years are freaking out. Without an allocation to real assets in the first half, portfolios got slammed.

That's no joke. Retirees and those close to retirement are indeed freaking.

According to a recent report by Cerulli, retirees have cited inflation as the top source of stress in retirement. Furthermore, a full quarter of workers are now postponing their retirement as inflation forces more and more Americans to dip into their savings accounts, according to a new report by BMO Harris Bank, which found that 36% of Americans have already seen their savings hit by inflation.

The good news for all those unnerved savers seeking to salvage their retirement, however, is that it's not too late to alter their IRAs — by getting real.

“We believe investors should always allocate to real assets to protect against typical levels of inflation, as well as unexpected levels," said Lee Freitag, practice lead for retirement solutions at Northern Trust Asset Management.

"Real assets such as real estate, natural resources and infrastructure can provide additional diversification benefits, with some returns outpacing traditional assets classes in a rising inflationary environment," Freitag said. "Additionally, all three of these assets can provide robust levels of yield not captured in current bond yields.”

Michael Cuggino, president and portfolio manager at the Permanent Portfolio family of funds, agrees that a healthy retirement account is better off containing a solid chunk of real assets — and not just when prices are rising.

“Most investors’ wealth generally consists of stocks and bonds, a retirement plan or 401(k) plan — which also likely holds stocks and bonds — and a personal residence, maybe a vacation home or income property," he said. "With that lack of diversification, it is important that a retirement plan encompass exposure to asset classes outside of those areas, such as precious metals like gold and silver, real estate other than that already held, commodities, and non-U.S. stocks and bonds.”

As to how big a portfolio allocation one should make in a retirement account, Vince Childers, head of real assets multi-strategy at Cohen & Steers, recommends an old practice on Wall Street: following the so-called “smart money.”

“Institutional managers — including sovereign wealth funds, defined-benefit plans, and endowments and foundations — frequently allocate as much as 20% to diversifiers such as real assets," Childers said. "By contrast, defined-contribution plan weightings in real assets are well below institutional allocations, averaging around 1%.”

There’s also the possibility that investors may be holding real assets in their workplace retirement account and not even know it.

“In evaluating one’s ongoing exposure to real assets, it is wise to look under the hood of what you likely already own — a target-date or target-risk strategy. It’s possible your retirement portfolio already has exposure to real assets,” said Todd Jablonski, chief investment officer for Principal Global Asset Allocation at Principal Global Investors.