Climate Change and Your Retirement
When planning retirement, you need to somehow prepare for many different kinds of unpredictable possibilities — inflation rates, stock market fluctuations and the prospect of a long-term care need for example. Any of these could have a dramatic impact on your finances. However, have you considered how the possibility of climate change might impact your retirement?
While we didn’t see the pandemic coming, we do want readers to consider anything and everything that might go wrong with their retirement. And, we are not willing to bet that the possible effects of climate change won’t seriously impact your health and financial well being.
You should at least consider how to plan your life and finances for possible climate disasters.
Is Climate Change a Future or Current Problem?
If you think about climate changes, you might believe that the impacts are too far in the future to worry about now. However, you might want to take a second thought at how it could impact your financial and personal well being immediately and throughout your retirement.
Afterall, remember that you are likely to live in retirement for 30 years or longer. A lot may change in that period of time.
Furthermore, the results of climate change might not be some future possibility. We are seeing dramatic climate events in 2020.
Remember that the results of global warming or climate change do not necessarily mean hotter temperatures. The immediate impact is that natural disasters like wildfires, hurricanes, snowstorms, heatwaves and floods are occurring more often and with greater intensity. And, it is important to note in 2020 (the year of Covid19), that according to the Harvard School of Public Health states, “many of the root causes of climate change also increase the risk of pandemics.”
Here are 9 things to consider with regards to climate change and having a wealthier, healthier future:
1. Assess If Climate Change Will Impact the Overall Economy
Just in the last year, the cost of natural disasters has been staggering.
The National Oceanic and Atmospheric Administration estimates that natural disasters have cost the U.S. economy over $1.7 trillion since 1980, and they have become more frequent and costly. In 2017 the combined cost of all natural disasters was over $300 billion.
But those disasters pale in comparison to the COVID-19 pandemic, which Harvard economist and former U.S. Treasury Secretary Lawrence Summers estimates will cost more than $16 trillion by the time it’s over.
The U.S. Commodity Futures Trading Commission’s 2020 report “Managing Climate Risk in the U.S. Financial System” says that “a central finding of this report is that climate change could pose systemic risks to the U.S. financial system.” The last “systemic risk” to the financial system was the financial crisis of 2008 that destroyed the savings of millions of Americans.
The report goes on to say, “a sudden revision of market perceptions about climate risk could lead to a disorderly repricing of assets, which could in turn have cascading effects on portfolios and balance sheets and therefore systemic implications for financial stability.” In plain English, that means:
- Stock and financial market crashes
- Insurers and providers of financial products (like an annuity) could go out of business
- Pension funds could go bust
- Hyper-inflation and deflation of the entire range of financial assets is more likely
- Taxes could rise to fund natural disaster response (and make up for lost revenue from lost jobs and industries)
- Your job could go away
- Bonds held from states impacted by climate change might not hold value
Think carefully about your own money in light of these economic possibilities.
2. Review How Climate Change Could Impact Your Own Investment Portfolio
People planning for life in 2035 and beyond should consider the risk climate change poses to their portfolios. Protecting your investment assets over the next two decades will require checking in with your retirement plan often to make sure you know your exposure to companies, industries and sectors that are unprepared for the future.
Business research group FourTwentySeven has done extensive research on the broad effects of climate change on businesses including supply chain risks, the danger for companies with assets in areas prone to flooding and wildfires, as well as regulatory risks as governments take action to drastically reduce carbon emissions. The results will surprise and shock you.
The top five companies most at risk to have their businesses disrupted by climate change were a cruise line, a technology hardware and equipment company, a chemicals company, a major utility, and a semi-conductor chip company.
Because climate change affects so many companies, from natural resources to office space in flood zones, investors have to take a hard look at the companies where they put their money.
Perhaps Think About Companies That Make a Positive Difference
But it’s not all doom and gloom! There are two sides to every coin, and in this case, you can use your investing power and the money you’ve saved to invest in companies that might thrive with climate change.
Don’t just take my word for it, three scions of the Rockefeller family — the family that invented the oil economy in the 1890s — wrote in a New York Times Op-Ed that people with a significant amount of money to invest should not put that money into banks that continue to invest in technologies harmful to our future life on Earth.
Many investors, including big, institutional investors like Blackrock, which has approximately $6.47 trillion of assets under management, have started to analyze companies according to how good they are to the environment, their employees and the people in their communities. You can do your own research on how a company scores in terms of its sustainability at Sustainalytics.com, a subsidiary of the analysis firm Morningstar.
Whatever your values are, investing in companies and sectors that you think will last another 20 years is just common sense.
When you use the NewRetirement Retirement Planner to model your investments and savings for the next 10, 15 or 30 years, you see a range of outcomes. The companies working to put the environment, and by extension the economy, on a more solid footing could possibly bend the curve on your projections in the right direction.
Some experts also believe that projecting hefty investment returns into the future may be overly optimistic. You may want to be extremely conservative with your overall rate of return projections.
3. Foster an Attitude of Resilience
The experience of 2020 has proven the value of keeping mentally as well as physically fit. Stressful times take an enormous toll on some people, while others build resilience into their lives to handle unforeseen stress.
As best-selling author Jim McCarthy told NewRetirement CEO Steve Chen, the secret to mental health as we age is to build better habits that lead to mental and emotional resiliency. Though some people seem more like orchids than dandelions, McCarthy says we can all develop skills for self-preservation and flourishing if we are mindful and take it one step at a time.
Preparing yourself for whatever life may throw your way is an important part of retirement planning.
4. Plan for Health Impacts
Protecting yourself from the health impacts of climate change should probably be a priority. No matter where you live, you are likely to experience some kind of increased medical risk.
According to the Medical Society Consortium, climate change is increasing the risk of heat related illness and worsening of chronic illnesses. There will also be an increasing likelihood of death from dangerous weather events and diseases from mosquitoes and ticks. Sickness from food and water will become more prevalent as well as more mental health problems.
5. Review Your Household Budget and Inflation Projections
Inflation and deflation are among the biggest risks to retirees.
Of particular concern may be food prices.
The Global Sustainability Institute’s research believes that food prices could increase significantly by 2040. In fact, their reporting suggests that food already costs twice as much now than it did in 2000 — though the increase is not entirely apparent to most people because processed foods are more prevalent and cheaper than natural foods.
6. Think Carefully About Where You Retire: Lifestyle Considerations
Perhaps the most obvious climate change consideration with regards to your retirement is where you choose to live.
The traditional retirement destinations of Arizona and Florida may no longer be the best option. Arizona is forecast to be deathly hot and there is the risk that Florida will be underwater.
However, no area may be “safe.” Who ever heard of derechos, atmospheric rivers and bomb cyclones just a few years ago? Nevermind the pandemic.
Globalchange.gov reports that most regions across America could be impacted by climate change:
Northeast: “Communities in the Northeast are affected by heat waves, more extreme precipitation events and coastal flooding due to sea level rise and storm surge.”
Southeast: “Decreased water availability, exacerbated by population growth and land-use change, causes increased competition for water in this region. There are also increased risks associated with extreme events such as hurricanes.”
Midwest: “Longer growing seasons and rising carbon dioxide levels increase yields of some crops, although these benefits have already been offset in some instances by occurrence of extreme events such as heat waves, droughts, and floods.”
Great Plains: “Rising temperatures lead to increased demand for water and energy and impacts on agricultural practices.”
Southwest: “Drought and increased warming foster wildfires and increased competition for scarce water resources for people and ecosystems.”
Northwest: “Changes in the timing of streamflow related to earlier snowmelt reduce the supply of water in summer, causing far-reaching ecological and socioeconomic consequences.”
7. Think Carefully About Where You Retire to Protect Your Home Equity
Insurers may not be pricing in the impacts of climate change into their offerings. As such, they may not be able to pay out when natural disaster strikes.
Cynthia McHale, director of the insurance program for Ceres, a nonprofit group that pushes investors to pay attention to the financial risks of climate change, said in an interview earlier this month that neither insurers nor their government overseers have a good handle on the risks that climate change poses to insurers’ various financial assets. McHale compared the situation to the one faced by big banks in 2008, when few sufficiently realized the magnitude of potential losses from the U.S. property bust.
What’s worse is that insurers may also cease to provide certain types of coverage in certain areas. In California, some home owners are finding that they are being denied fire insurance if their home is too close to rural land.
Depending on where you live, you may want to think through self insurance. At the very least, you will want to invest in the best insurance possible for your particular financial profile.
Home equity is usually the most valuable asset for any household. Protecting that equity from climate change disasters is really important to consider if retaining that wealth is a financial goal. It is even more important if you are planning on using that money to help fund retirement costs.
8. Think Through Disaster Preparation Costs
You may have your heart set on the dry, warm weather in Arizona or the pleasant tropical breezes coming off the Gulf in Florida, but in ten to twenty years the cost of keeping comfortably cool in the Arizona desert or hurricane-proofing your house in Florida may be more than you budgeted for.
When planning where to retire, take into consideration the costs of protecting yourself from severe weather and possible disruptions to services that may result from those events. Not only should you factor in the cost of state-mandated flood insurance in Florida, but you should also make sure your current home (or your new home if you relocate) is ready for whatever disasters might come your way.
9. Have a Disaster Plan in Place
A great plan isn’t rigid and written in stone. A great plan is flexible and takes into account many contingencies. But, you really need a plan.
Emergency Funds: Many advisors recommend building up six months’ worth of emergency savings to cover unexpected job loss or other financial emergencies.
Evacuation Plans: It is important to have a written list of how you are going to evacuate and what you need to do and get out of the home if you have to leave.
Sheltering in Place Plans: In addition to evacuation plans, you also want to have supplies on hand to sustain you if disaster strikes but you are able to stay home.
If Climate Concerns You, Contact Lawmakers
Our individual decisions — about where to invest our retirement savings and how to plan for the unexpected — only go so far. To make a bigger impact on the future security of your retirement and the planet you leave your heirs, call, write or text your lawmakers.
The Commodity Futures Trading Commission’s report says, “financial markets will only be able to channel resources efficiently to activities that reduce greenhouse gas emissions if an economy-wide price on carbon is in place at a level that reflects the true social cost of those emissions.” For decades the price of polluting has been too low, and only pressure from local, state and the federal government can impose a cost on pollution that reflects the costs it imposes on humanity.