5 Tips for Retirement Planning & Climate Change

During the best of times, planning for retirement is difficult. But now, there is no longer just a concern of prospective financial uncertainty, but also climate change uncertainty. This has left many individuals feeling unsure, to the point of paralized, when it comes to planning for retirement.

If thinking about the future and climate change is stressful, know you’re not alone. Almost 70% of Americans are worried that climate change will threaten their financial security in the future. Millennials are particularly sensitive, being more likely than any other age group, to strongly believe that climate change will directly impact their health and influence where they can spend their retirement.  

While much of the news around the climate crisis sounds dire, there is some silver lining. There are steps you can take now to better position yourself to meet uncertainty face on.  This is the time to do your research and ask questions. Being prepared for the future is more important than ever now. 

1. Research locations.   

The most popular retirement destinations are usually warm spots along the ocean – Atlantic, Pacific, or Gulf coasts. Or a sunny desert vibe like Arizona or Las Vegas. While this all sounds very lovely, until you consider that these idyllic destinations are anticipated to experience some of the worst climate change impacts in the nation. 

In light of predicted changes in climate conditions, it might be best to avoid areas vulnerable to sea level rise, wildfire, and unsafe heat. While property values are still strong in most coastal communities despite flooding,  in mountainous regions despite  wildfire, and in the southwest despite drought and heat – this may change in the not so distant future. Something else to consider is the very real possibility of insurance companies dropping homeowners’ policies in vulnerable areas because of the risk involved. We are seeing this happening now and it’s expected to only get worse. 

A good way to understand whether changes in a particular area is to read local newspapers and to visit local social media groups. You might find information or discussions about weather changes that you wouldn’t necessarily see reported on the national level. In addition, it is good to stay up-to-date on market trends and climate research. There are also many popular articles on the web reviewing things like the best places to live in light of climate change. 

2. Consider future economic impacts. 

The economic impacts can take many forms besides the obvious things like losing a home built too close to the coastline paying higher costs for air-conditioning. One study found that natural disasters resulting from climate change negatively impact residents’ financial health in a multitude of ways; from increased rates of mortgage to delinquency and foreclosures to lowering credit scores, to increasing bankruptcies. As natural disasters become more frequent, it is forcing communities to consider drastic and costly measures. 

In many cases, the federal government will likely have to pay for some of these costs, which technically we the taxpayer pay for through federal income tax. As a result of increased natural disasters, residents in the most affected states will likely see a rise in taxes in order to cover costs. 

It’s best to plan for a higher cost on almost everything. Factors such as increasing heat, drought, and flooding may lead to increased crop failures that will impact the price of food. Other factors like a breakdown in distribution could disrupt manufacturing and increase prices. Being prepared as things become more expensive in the long-term has never been more important.

In relation to higher costs, plan for lower returns. For example,  higher inflation driven by climate change may erode real returns, lowering the value of your portfolio. Also, returns on individual stocks may decrease as companies move away from fossil fuels and rebuild their infrastructure towards green energies. Consider this,  the S&P 500’s SPX, -0.10% average real returns after inflation have stayed between 6% and 7%, this may not be the case several years down the line. It might be a good idea to create a climate-friendly retirement portfolio that invests less in fossil fuel heavy industries and  more towards green industries and 

3. Ask the right questions.

Here is a list of some questions you need to consider when deciding where to retire: 

• How might an extreme weather event affect me?
• Will I be forced to evacuate every summer or fall because of hurricanes or wildfires? How will this impact my quality of life?
• Will I be able to get a reasonably priced insurance policy to protect my house from weather and climate disasters?
• What kind of financial burden will I have in fixing or protecting my home from weather and climate problems?  
• How much will home repair impact your retirement budget? 
• How can I plan a retirement budget for weather-related damages to your property? 
• What is the cost of repairs might for events like flooding, wind, and fire damage? 
• How much will it cost to hire professional services to prepare our homes to respond to unpredictable weather events? 
• Does your retirement dream destination community offer adequate emergency transportation, health, food, and shelter for older people—not just services designed for younger, healthier, and more mobile evacuees?

4. Plan to be Well-Insured.

A surprisingly small percentage of homeowners in low-lying coastal areas have flood insurance. The potential to lose everything if a big flood comes is all too real.  Don’t put yourself in this position. It’s important to do your research and figure out what insurance policies you will need to stay protected based on the likely hazards in your area (e.g., floods, wildfires, or earthquakes). A good rule of thumb, if your budget can’t accommodate the insurance costs in a given area, take that as a good sign you should consider other locations for retirement. 

Something else to keep in mind,  even if you’re well-insured, if something happens to your home, it could take years to rebuild it. Also, most insurance policies only cover rebuilding in the location as the previous house, so you could find yourself just recovered from one disaster to now be faced with another. Alternatively, you could rent a home rather than buy it, especially if you’re planning to retire to an area vulnerable to extreme weather conditions. 

5. Create an emergency supply budget.

While your retirement saving will help cover your cost of living, your emergency savings plan is equally as important in protecting your future livelihood. 

It is during the retirement years that you are most vulnerable to emergencies. When you live on a fixed income, there’s no way to cover the difference between the money you have and the money you need to cover additional costs. An emergency retirement fund should cover at least 3-to-6-months of your living costs.  For example, if your monthly retirement budget is $4,000 a month, then multiply your ideal number of months (i.e., 3-months or more) times $4,000 for your ideal retirement emergency fund balance (e.g., for a 6-month cushion you should have $24,000 saved in your emergency budget).

Interested in planning for retirement or in building a climate-friendly portfolio with climate change, reach out to Herman & Company – Accounting & Consulting for more information.