If you’re close to retirement or already retired, merely reacting to the latest bout of market volatility, viewing it as a warning, may not be enough. It’s time to sit up and take notice, understanding what a larger potential correction could do to your financial situation.
Could a market correction, like the one we experienced a decade ago, sink your retirement plans? For those near retirement, a 15% to 20% market decline likely wouldn’t make a big change in retirement lifestyle. However, a downturn of 30% to 40% could be catastrophic.
Instead of hiding and doing nothing (which could be a big mistake) or panicking and abandoning your plan altogether (which could be an even bigger mistake), why not consider taking some defensive measures? If you’re counting on your investments for income, you may not be able to just hold on and wait out another rough market cycle. Your savings will now be subject to “sequence of return risk.” That means, if the market is down and you need the income, or if you are 70½ and taking RMDs you may have to take the money while you accounts are down! The markets will typically bounce back, but your accounts may not.
Now may be a great time to make the shift from a portfolio built for growth and accumulation to one that’s about income, wealth preservation and tax advantages. Two questions to ask yourself:
- If you’re close to retirement or already retired, and the market goes up 20%, will it change the way you retire?
- If the market goes down 40%, will that change the way you retire?
If you answered NO and then YES , here are some steps to take to help safeguard your retirement future:
Take a fresh look at your goals as you transition from working to retirement.
The clearer you are when envisioning and defining your goals, the easier it should be to reshape your financial plan to achieve them. Think about it: If you’re going to bake a pie, you begin with the end in mind. You choose the ingredients, purchase them at a good price and prepare them in a certain order to make the best pie you can.
Creating a wealth-preservation plan should work the same way. Up until now, you may have had a hodgepodge of investments amassed with one goal: accumulation. But in retirement, your portfolio could benefit by being more specific. What investments, products and strategies will get you where you want to go?
Build an income plan that can help keep you afloat if the market crashes.
What type of guaranteed or reliable income sources will you be living on? Social Security, a pension, real estate, annuities, bonds? These retirement “paychecks” can help serve as your lifeboat: If they provide enough money to cover your basic living expenses, or close, you won’t feel the need to jump out of the market should your investments flounder a bit.
In the current interest rate environment, bonds have become a more challenging place to get income, so you may want to consider indexing products as an alternative. Insurance companies now offer indexed annuities and life insurance, which are fixed products that allow you to participate in a percentage of the market’s upside while protecting you from a loss. (Like everything else, no one product can fit everyone’s needs, so find a fiduciary who will recommend the ones that best fit your needs.)
Consider a more conservative investment plan.
The risks you’re willing to take in your working years can be more dangerous in retirement, when you’re pulling from your nest egg rather than contributing to it. That doesn’t mean you should eliminate all risk. You’ll need to hold inflation at bay if you want to be able to afford a long life in retirement. But you should consider minimizing the impact a market downturn can have on your portfolio. Investments that fluctuate with the market, such as stocks and bonds, need proper diversification to reduce volatility risk.
Mutual funds and ETFs have become popular because they’re an easy way to diversify, but they’re still subject to the market’s whims, and it’s easy to duplicate holdings. Take the time on your own or with your adviser to go through the positions you hold and make sure they match up with your objectives.
Don’t overlook the importance of tax efficiency.
When you were working, you probably asked your tax preparer to save you as much money as possible on your return each year. Retirement planning, though, is all about the long journey. If you have all your money in a 401(k) or some other pretax account, you could end up running into a wave of taxes in retirement. It’s crucial to have a plan for when and how much you’ll pull from your retirement accounts and how those withdrawals will work with your other income sources.
You may also want to convert some money to a Roth account or find another strategy to reduce the tax hit you could take in retirement. Due to the deficit, some feel taxes are going up in the future and that the tax brackets today may be the lowest we’re are ever going to see in our lifetimes.
Work out the basics of your legacy plan sooner rather than later.
Of course, your primary retirement planning objective is to be sure you don’t run out of money during your lifetime. That can make legacy planning a challenge, especially when you’re concerned about market volatility. But if you plan now, it could save you and your loved ones money later. Talk to an experienced professional about life insurance, trusts and other strategies that will ensure your loved ones get what you wanted them to have. Don’t wait until your health or mind is failing to put this part of your plan in place.
If the latest ups and downs in the market made you a little queasy, don’t fret. Maybe you didn’t make the changes you wanted at the top of the market, but you may be close enough. There’s no time like the present to right your ship and sail forward with confidence.
