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  • Writer's pictureJeran Van Alfen, CFP®

How to Make Retirement Decisions in a Down Market

Retirement is one of the most important financial milestones that we invest for. Over the years, we do the best we can to accumulate a nest egg that is dependable and, after saving for so many years, it is gut-wrenching to see account values fall just as we are ready for that next phase in life. The S&P 500 has experienced double-digit positive returns in 8 of the last 10 years. Those returns helped boost values and build confidence that retirement is within reach, but it is difficult to remember those good years when you’ve lost money recently. If you are facing retirement in this market, here are 4 steps that you need to take.

Maintain your perspective

A major fear that I discuss with clients that are in or near retirement is that they won’t be able to recover from a market setback. This is a valid concern, but it is typically magnified because we are usually focused on immediate needs. However, it is important to avoid near-sightedness, because longevity is actually one of the primary risks for running out of money in retirement. We have to plan and invest for possibly 30-40 years beyond your retirement age. Here are 3 ways to maintain perspective:

  • Avoid making emotional decisions. "When markets feel volatile, the urge to react can feel compelling," says Naveen Malwal, institutional portfolio manager with Fidelity's Strategic Advisers LLC. Everyone feels this. However, this urge to react can lead to our worst investment mistakes. The market moves so quickly that if we take action and sell out of our investments, we may miss the recovery that will keep us on track for our goals. Consider this chart:

  • Set reasonable expectations. When we build a retirement plan, we take into consideration how money is allocated to various asset classes, and we set expectations for our rates of return over time and the volatility that we expect.

This target allocation example shows an average return of 7.6%, but keep in mind to get that average, our returns will vary greatly year over year. In fact, from 1979 to 2020, the S&P 500 had an average return of 12.35% per year, but there were only 3 years during that period that the market actually returned between 9% and 12%.[1]

Recently, it has become easy to expect double-digit positive returns on our investments. Accommodating monetary policy, government bail-outs, and low-interest rates have given us some years of smooth-sailing. A down market like the one we are experiencing this year is difficult to stomach, but it is actually aligned with our long-term average return expectations.

  • You may feel ready to give up on stocks, but remember stocks are your long-term defense against inflation. A flight to safe assets can make you feel like you are holding on to your money and keeping it safe, but this move can make a huge impact on your retirement. Remember that over time, you are losing money to inflation if your returns are not keeping up. This means that while your money may feel safe in cash or fixed-income investments in the short-term, you are still taking a lot of risk over the long-term.

Assess where you actually stand

If you are worried about how changes in your portfolio value have affected your goals, it is time to ask some specific questions. Here is what you need to know:

  • What will your guaranteed paycheck be?

o This is the income that you can count on regardless of what the market does. Social Security, pension, rental or business income. What will be your monthly paycheck and what net amount will hit your bank account?

  • How much income will your portfolio safely provide?

o If your assets are down and you are planning on making withdrawals, your safe withdrawal amount may have changed.

  • Which accounts will you withdraw income from first?

o It is important to consider risk, taxes, and diversification when withdrawing from your portfolio. If you have different types of retirement accounts, it is important to know which accounts to draw money from first.

  • How will you pay for larger expenses?

o When the markets are down, it is usually not the right time to make a large withdrawal and it is a good idea to have an emergency fund for larger expenses that will come up.

  • What are the back-up plans?

o Can big purchases be delayed, or do they need to be financed for a period of time? If the budget is tight, what expenses can be adjusted?

Answering these questions will help you create a plan that is sustainable. The timing of your portfolio withdrawals can be extremely important to your retirement, so it is important to plan ahead.

Invest with purpose

When you allocate your retirement portfolio, it is extremely important to be deliberate in how you choose the assets that you own. Here are some key things to remember when diversifying your money.

  • Keep enough of your money in cash to feel comfortable. This is the money that allows you to be a smart investor and stay invested. If you keep enough cash on hand to cover your short-term needs, you can afford for your risky assets to make it through their cycle.

  • Evaluate if you need more guaranteed income. If you are concerned that you will not be able to sustain your withdrawal needs an annuity may be a tool to consider. Annuities are products sold by insurance companies. There are many types of annuities and many product variations, so it is extremely important to examine all of the risks before you purchase an annuity. It is common for financial salespeople to glorify annuity benefits in order to earn a commission and the products are sometimes difficult to understand and illiquid. All that being said, an annuity provides a way for an investor to transfer their risk of running out of money to an insurance company. The goal of an annuity purchase should typically be to secure a guaranteed income stream throughout your lifetime. Because insurance companies use mortality calculations to provide an income benefit even if an account runs out of money, this may be a useful tool to reduce risk in a portfolio. Make sure to do your homework before purchasing financial products!

  • Try to find diversified income streams. It is a good idea to build assets that are uncorrelated and that will provide income. Markets typically don’t move in unison, so it can help to have income from different types of assets. Consider real estate income, stock dividends, bond yields, and commodity income as pieces of a diversified income portfolio.

  • Invest for growth. If you have covered your short-term needs and your income needs, then the next step is to invest for growth to maintain your purchasing power. This piece of your portfolio be volatile, and your values will fluctuate year over year, but the goal is to grow over the long-term.

As you make decisions for retirement, you can never be too prepared. Make sure to get your questions answered and feel good about your plan. Down markets are always frustrating, and it can feel like the timing is horrible. Remember, that you plan for them. You will experience several more down markets in your lifetime and that should be accounted for. Stay centered and keep looking forward!

Centered Financial, LLC is a registered investment adviser offering advisory services in the State of California, Utah, Texas and in other jurisdictions where exempted. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. There is no assurance that the techniques, strategies, or investments discussed are suitable for all investors or will yield positive outcomes. To determine which strategies or investment(s) may be appropriate for you, consult your financial adviser prior to investing. Any discussion of strategies related to tax or legal planning is general and is not intended as tax or legal advice. Please consult appropriate tax and legal professionals for recommendations pertaining to your specific situation.



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