How will climate change impact your retirement?
FFinances, medical costs and life expectancy top of the worry list for retirement savers. They may want to add climate change to this list.
In 2021, more than 40% of Americans lived in a county that was hit by climate-related extreme weather, according to a To analyse by the Washington Post. This statistic is not expected to decrease in the future, and most of us will see climate change affect our sunny days.
Whether you’re decades away or just retired, here are some tips on how to prepare your retirement finances for climate change.
Climate change and your wallet
No matter how far away retirement is, environmentally conscious investors can tailor their investments to their beliefs today.
Strategies like ESG investing, impact investing and SRI investment are popular ways for investors to support positive social and environmental change while earning a competitive return. The fight against climate change is a central objective for all three strategies.
These investment approaches have become increasingly popular in recent years, with a record nearly $650 billion paid out worldwide. ESG funds in 2021, up more than 225% compared to 2019.
“Already, climate change is impacting the way investors generally think about how they can invest,” says Greg Bassuk, managing director of AXS Investments. “Everyone is talking about ESG investing because the climate impact really impacts people’s lives and their personal finances.”
Greater awareness of ESG investing and related strategies has also helped to dispel myths that investors must sacrifice returns in pursuit of positive social change. In 2021, ESG strategies outperformed non-ESG strategies, according to Data from Morningstar.
More ESG bond funds
Importantly for retired investors, there are a growing number of ESG-focused bond funds available. This is a key development for investors who are shifting their asset allocation toward obligations as they age.
As you might expect, these ESG and so-called green bonds often fund projects that help improve the environment, like clean energy initiatives, and communities, like housing projects or diversity initiatives. “It’s a game-changer specific to the retirement investor set,” Bassuk says.
Review your existing holdings
Climate-friendly retirement investing isn’t just about new opportunities. It is also important to assess how various companies already present in your wallet will be positively or negatively impacted by climate change, recommends Dan Hawley, president and chief investment officer of Hawley Advisors.
For example, shareholders of a Assurance the company needs to assess its long-term business prospects in light of climate change, including the company’s ability to pass on rate increases to customers or whether it will refuse to insure homeowners in certain parts of the country that may be more likely to need to file claims as a result of climate change, he says.
More than 90% of the country west of the Rockies, for example, experienced drought last year, according to Washington Post analysis, leading the region to be more likely to battle wildfires.
At the other end of the spectrum, climate-focused investors can look for companies that will directly benefit from tackling climate change, Hawley says. “The opportunity is on the infrastructure side as we build it,” he says. “It’s an emerging field.”
Climate change and your budget
As with investments, some people are now taking proactive steps in their budgeting to deal with climate change. For example, they can set aside money to add solar panels or switch to energy-efficient appliances, making their home more low consumption in addition to saving them money in the long run.
“Investing in your residence has become a big priority in the conversations we have,” notes Bassuk. “You should set aside dollars for some of these expenses now.”
You’ll also want to plan for unexpected climate change-related expenses before you have a fixed income in retirement. Because these costs will not appear when you calculate the numbers in a retirement calculatoryou may want to budget a little higher than recommended to be more certain that you can retire comfortably.
For example, homeowners should consider whether the cost of property taxes and insurance will increase following natural disasters, Hawley says.
“How much will insuring your property cost? What is the likely impact of a hurricane on your property taxes?” he asks. Such questions force savers to consider the big picture: “What will happen it of your cost of living?”
Some of Bassuk’s clients, particularly Florida residents, are already grappling with a variety of new budget considerations, he says. Top of the list are the costs associated with remediating floods or other weather-related damage.
Climate Change and Your Retreat
Not only could your cost of living change due to climate change, but also your choice of where to live. Many retirees have always flocked to warmer places, like Florida, Arizona, Texas and other southern states. But the prospect of rising temperatures, floods and other extreme weather events could make them less attractive in the future.
“We are now seeing that climate change is impacting this lifestyle choice,” notes Bassuk. Additionally, retirees need to think about mobility and accessibility issues, both of which could be affected by events like flooding, he adds.
With climate-related risks now well known in many retiree-friendly parts of the country, people should consider this information if they’re considering taking a big step into retirement, advises Hawley.
But don’t rush to make an offer on a home just because it’s in the region most prone to climate change. Hawley’s longstanding advice to retirees still stands: “Try it before you buy it,” he says.
You’ll want to visit a place often before you move, to get to know the community better and how it will meet your needs, including access to health care. “Make sure before you move you really check out where you’re going, and if you’re going to move, visit the four seasons,” he says.
Climate change and overview
Climate change is probably just one factor in a variety of personal financial decisions you make before retirement, from small ones (like how to invest your money) to big ones (where to live). It can also factor into a wider range of less personal financial decisions.
In October 2021, for example, the Ministry of Labor proposed a rule Remove barriers to incorporating ESG factors into retirement savings plans and workplace pension plans.
“It’s a really radical change,” notes Bassuk. And because the rule change is squarely focused on climate-related risk, it could open up a lot more investment money to ESG-style investing strategies, he adds, which could help increase returns of ESG investors.
A similar systemic change is likely to occur in real estate investing, according to Bassuk. Investors may need to factor in climate-related costs for investment properties, or even which parts of the country will be desirable for retirees, if that moves away from places like Florida. “As these models change, we believe it will also impactfully change where and how people invest,” he adds.
The risk of climate change is what people should consider, says Hawley. “People need to be risk managers, both in terms of life choices and investment portfolios,” he says.
Finally, even if climate change doesn’t seem to be a factor in your life yet, other people are clearly thinking about it and planning for the future with the change in mind. “What I don’t think people fully appreciate is how real it is,” Bassuk says, adding that many of his clients don’t just talk about climate change, they take proactive steps to Prepare for a big impact.
“It’s the tip of the iceberg, but the iceberg is melting very quickly,” Bassuk said. “Not only will this be a topic for the next few years, but we think things will change quite quickly in terms of where people go to live and less direct themes, like how they invest.”
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.