How to deal with volatile markets as you approach retirement

Now’s a good time to assess whether you have the right plan in place

August 16, 2019

Bob Bonfiglio,

Retirement is an important milestone that often comes after years (or decades) of careful planning. For those who’ve saved diligently and are nearing the end of their careers, the mere thought of market volatility can send shivers down their spines. Will a sudden drop in the value of their portfolios impact their ability to retire? Will they really have enough money to live off of for the rest of their lives? Should they put their retirement plans on hold so they can maintain a steady paycheck?

If you are in this situation, now’s a good time to assess whether you have the right plan in place to help you transition confidently into retirement, no matter what happens in the broader market. Here are some tips to keep in mind:

• Pick your retirement date: If you haven’t already, take time now to decide the year and month when you (and potentially your spouse or partner) want to retire. You may find it is closer than you think, just a few years away. Or you may decide you want to extend your time in the workforce — whether it’s continuing your current career or moving into a new full- or part-time role. Either way, your answer can have a big impact on your investment decisions from this point forward.

• Ensure your investments are diversified: Various parts of the market react to headlines and economic drivers differently. For those nearing retirement, the recent spike in volatility is a reminder of how having a broadly diversified portfolio can help reduce your investing risk. The goal of diversification is that if some of your investments lose value, those losses could be offset by gains with other investments.

How do you know if you’re properly diversified? The simplest answer is to check to see that your portfolio contains a mix of stocks, bonds, mutual funds, short-term cash investments, savings and other investing vehicles that take into account your goals and comfort-level with risk.

Decades from retirement? How to handle market moves
If you are an investor with multiple decades to prepare for retirement, here are some steps to keep in mind when the market moves significantly:
• Revisit your views on risk: There’s nothing like a significant market downturn to remind you that investing involves risk. Market swings provide an opportunity to reassess the level of risk in your portfolio and determine whether you still think the amount is appropriate for your circumstances. The level of comfort (or discomfort) you feel when the market moves up or down substantially is a good starting point on whether your portfolio fits your risk profile.
• Remember that time is on your side: In theory, the longer you have to let your money work for you, the less concerned you should be about short-term market moves. Fluctuations in stocks are nothing new. And historically, markets have always recovered from losses incurred during corrections or bear markets. By the time you’re ready to retire, it’s likely that a market downturn in hindsight will only look like a bump in the road.
• Put volatility to work for you: Market volatility can work to your benefit by tapping into the power of a strategy called dollar-cost averaging. Here’s an example of how it works: Say you invest a fixed amount of money at regular intervals, regardless
of market conditions. When the market dips, you can purchase more shares. And when the market rises, you can purchase fewer.
The goal is to end up with more shares, often purchased at an overall lower cost per share than if you had invested all the money at once. Then the shares have the potential to increase in value over time. (Dollar-cost averaging does not assure a profit or protect against a loss in declining markets.)
This strategy is one example of how volatility may work in your favor if your investments move up or down in the short term, while eventually recovering lost ground in the long term. If you make regular contributions to a workplace retirement plan, IRA or other investments, you are likely already using this strategy. If not, consider this example as motivation to explore whether you can make consistent investing a goal for this year.
• Meet with a professional: If you are concerned about the recent performance of the markets, it may be a good time to sit down with your financial advisor. Together you can talk about your financial goals for the future and what steps you can take next to start on the path to achieving them.

Going a step further, ensure you understand how each asset or investment in your portfolio is helping you reach your financial goals. If you’re unsure or want a second opinion, consider consulting a financial advisor for guidance.

• Balance your need for protection with growth: Protecting your portfolio from current or future market downturns becomes more important as you approach the day when you start living off your savings. Consider investing the money you plan to use for income in the first few years of retirement more conservatively in liquid vehicles that are easy to access. This can help give you peace of mind that you are prepared to handle upcoming expenses should the markets swing.

It’s also important to remember that your retirement could last 20, 30 or even 40 years. Balance your need for protection with continuing to grow your nest egg. Assets you won’t need for some time could be more aggressively positioned. At a minimum, ensure your assets can keep on pace with rising inflation.

When the market moves, it’s an opportunity to compare your investment strategy to your goals. Are you on track? No matter the answer, there are steps you can take to feel more confident about your ability to retire when and how you want to.

Retired? Here’s what to do when the market swings

For several years leading up to 2018, the stock market was abnormally calm. Stocks had some ups and downs, but generally continued to march higher without much disruption. Then, in the fall of last year, we started to see a spike in market volatility. More sizable drops in the prices of stocks — even when quickly erased by gains the next day — generated unease for investors who had become accustomed to smoother investing conditions.

Historically, of course, market volatility is more of the rule than the exception. But it can cause even the savviest stock investors to ask, “Do I need to take action?” And for investors who are retired, an even bigger question may arise: “How will moves in the market impact the savings I am living on?”

If you are asking either of these questions, know you are not alone. When you see the daily headlines about what might be to come, it’s natural — and even prudent — to step back and ponder what you need to do next. Here are two steps to consider:

• Review your withdrawal strategy: Depending on how much money you have invested in stocks, your portfolio may lose value when the market dips. If market swings and the potential for a greater downturn make you nervous, revisit the amount of money you withdraw monthly to meet your expenses.

As you review, the goal is to be assured that the amount you withdraw to meet the next year or two of expenses does not put your long-term financial security in jeopardy. If your base of assets is reduced, you may have to trim your withdrawal amount to assure you have a sustainable long-term income strategy.

• Don’t take unnecessary chances in your stock exposure: For the long-term investor — which includes you as a retiree — volatility in equities can work in your favor. It’s possible that you will spend one to three decades in retirement, giving you time to withstand some market moves. At the same time, it’s important to preserve your base of savings and not be overexposed to stock risk. Review your exposure in the context of your full financial plan to evaluate if you are taking the right amount of risk.

Additionally, focus your equity portfolio on higher quality stocks — primarily blue-chip companies that tend to demonstrate more stable performance. Stocks that pay competitive dividends may also be an effective choice to provide a source of reliable return on your investments.

These steps are a good starting point to test whether your investments are properly positioned to provide a secure retirement. If you want help determining what additional steps may be right for you, consult a financial advisor in your area.

Robert Bonfiglio, a certified financial planner, is CEO and private wealth advisor at Rise Private Wealth Management in Bedford. He can be reached at 603-606-4255.

Categories: Finance