“I’M LOSING MY NEST EGG!”: NAVIGATING MARKET VOLATILITY FOR RETIREES
In our last blog, we explored a fresh perspective on market volatility (i.e., one that is not net negative) and discussed strategic ways to invest when you’re in the accumulation stage.
When you’re in retirement, though (or close to it), this kind of volatility can have a much greater impact on your financial wellbeing, so you need to take a slightly different approach.
With that in mind, below are five ways to bolster your financial security—and your confidence—in retirement, no matter what’s going on in the market.
1. Strike a Strategic Balance
The first thing to remember is that retirement doesn’t mean you pull out of the market. You’re no longer in your prime earning years, so it is important to minimize risk, but you still need your money to keep pace with inflation—and stocks are one of the best ways to do that. So when my clients begin the transition into retirement, we typically reduce the percentage of stocks in their portfolio to minimize volatility while still allocating a portion to growth.
2. Establish a Strong Foundation
For the above strategy to work well, it’s important to have a strong foundation of other income streams that support your everyday lifestyle in retirement. That way, when the market does fluctuate, it doesn’t directly affect your cash flow. This also allows your money that is allocated to the market to continue growing without you taking from the principle.
If you don’t have a pension or Social Security benefit, or the income they provide isn’t sufficient to support your retirement lifestyle, we often look at other ways to establish guaranteed income.
One of the ways you can do this is with guaranteed lifetime income, where you invest a set amount of money into an insurance product, and you receive guaranteed income for the rest of your life. The amount of income you receive varies depending on your age, how much you pay into it, and interest rates—and if you live long enough, you earn all your money back with interest (and sometimes much more). This is a strategy that works best for people who are in good health and have a family history of longevity, since you continue to receive payments as long as you live.
You’ve probably heard this called an annuity, but it operates exactly like a pension—and since fewer companies are now offering pensions, it can be a valuable way to establish guaranteed income in retirement.
There are other similar strategies and products such as guaranteed interest, bonds, and CDs, but the important thing is to diversify your portfolio and income streams so you’re not as reliant on stock market performance.
3. Create a Cash Reserve
When you’re in the accumulation stage of life, one of the biggest threats to your financial security is job loss, so we recommend setting aside about six months’ worth of living expenses that can “tide you over” while you search for a new job.
In retirement, though, recovering cash can take longer, so we recommend setting aside a year to two years’ worth of expenses. That way, you have more flexibility with your cash flow and won’t feel compelled to sell stocks at an inopportune time.
4. Make a slow transition
One of the most important things we help our clients do is make the transition from the accumulation stage into retirement. When you’re faced with market volatility, a changing economy, and the general uncertainty that is our world, this transition is best made slowly. No one has a crystal ball, and it’s helpful to give yourself time to adjust both financially and mentally to this shift.
The mental shift is sometimes the most difficult—you’ve spent your whole life earning money and saving, and now you’re supposed to start spending it. It can be challenging to enjoy this change if you don’t feel confident about your financial security. That’s why it’s so important to have a plan and educate yourself about that plan—because when you know where your money is going and why, you don’t have to worry about making the wrong choice or overspending.
In fact, research from The American College has found that people enjoy retirement more when they have guaranteed income because they’re not worried about running out of money. They’re not worried about the market or what’s going on around them, and they have freedom to spend what they worked so hard for.
When you’ve just retired and you’re excited to have fun and make memories, that kind of freedom is incredibly powerful.
5. Talk about it
In seasons like this, when the market seems unstable and the future feels uncertain, I always encourage my clients to reach out to me. When they do, I remind them of the big picture—that this is one season in a lifetime of financial preparation; that we’ve diversified their portfolio to prepare for this kind of volatility, and that this is what the market does—and it will almost certainly bounce back.
If you’re worried about what the market is doing, review your plan with your advisor. Discuss why you’re doing what you’re doing. I’ve found that the more you understand about your portfolio and the strategies you have in place, the more peace of mind you have about your financial security.
And when the news is striking a fearful chord, remember—they’re doing what they have to do to get viewers and ratings. As your financial partners, we’re doing what we need to do to keep you on track for a great future.
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