Retiring with Volatility

Should Retirees Be Worried?

Market volatility is an historic inevitability; as a long-term investor, you are likely to experience years of volatile or negative portfolio growth. If volatility coincides with your retirement, you might be worried about how it may affect your savings and income.

While history tells us that stocks perform well over the long term, in the short term, market shocks like low crude-oil prices, geopolitical uncertainty, and concerns about the global economy can cause markets to fluctuate severely.

Should I Be Concerned About Stock Market Volatility?

Anxiety about market volatility is normal. Over 60 percent of investors in a 2016 survey reported feeling concerned about retirement security because of market volatility. However, it’s critical not to let your worries take over and derail your investment strategies. One of the worst things you can do as an investor is panic and sell during a downturn. Unfortunately, that’s exactly what many investors do, harming their long-term financial goals.

The good news is that despite headlines to the contrary, long-term volatility hasn’t actually increased. A recent study that examined stock returns between 1926 and 2014 found that while large daily price fluctuations may occur more frequently, they are usually offset by similar daily rallies. Market volatility hasn’t discernibly increased when measured over periods longer than days. Since we can’t predict when volatility or pullbacks will strike, it’s important to make advance preparations to mitigate the effects of volatility in your retirement strategies.

What Should I Do If Markets Are Negative Multiple Years In A Row?

One of the major risks facing retired investors is the effect of multiple bad years of performance. What professional investors call “sequence-of-returns risk” is a real problem to consider, because liquidating investments for income in a bad market can amplify the effects of negative returns on your savings. While we can’t predict the timing of market returns, we use sophisticated services to test different market scenarios and attempt to create retirement strategies that have a reasonable probability of success. In addition, we use simulations to take into account the risk of a sustained period of declines.

Another way to manage the risk of bear markets and volatility could be by creating multiple streams of income, such as Social Security, a pension, dividends, and income from rental properties and other sources, so that you aren’t completely reliant on the stock market to support your retirement spending. Creating an income floor can help ensure that your basic living expenses are covered, regardless of how the stock market is performing.

Will I Have To Cut Down On My Spending In Retirement?

One way to mitigate the effects of volatility is to be flexible in your retirement spending. If you can reduce your portfolio distributions during poor or volatile markets, you can reduce the negative effects on your overall portfolio. Having the flexibility to increase distributions during good years and reduce them in bad can vastly improve the health and longevity of your portfolio. Relying on alternate sources of income can help you meet your financial needs without relying entirely on liquidated investments.

Will I Need To Defer Retirement?

If you reach retirement age during a period of extreme volatility or a downturn, you may want to speak to our team about the timing of your retirement. In some cases, deferring retirement for a few years to accrue additional savings or give your portfolio time to recover can be a savvy move. In others, gradually transitioning into retirement and limiting the distributions you take from your portfolio can also mitigate the effects of volatility. However, the decision of when and how to retire is a complex one in which your financial situation is just one factor. It’s a good idea to speak to our team or your financial professional about any and all of your concerns as you make preparations for your retirement.

Investing involves risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values.

RetirementPlanning Retiring with Volatility Retire Age ChartV2

It’s Impossible to Predict What Market Conditions You Will Face In Retirement.

Market performance in the years immediately before or after retirement can have an enormous impact on your financial well-being.

While some investors respond to the risk of stock-market volatility by getting out of markets entirely, we believe that thinking can be flawed. With American life-spans increasing each year, retirees can expect to spend twenty or thirty years living on their retirement savings. Investing too conservatively can increase the risk that a retiree will run out of money later in life.

If you’re worried about the impact of volatility on your retirement savings, give us a call to talk about how we can help guard against this risk and strengthen your retirement strategies.

Please remember that different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product made reference to directly or indirectly in this content, will be profitable, equal any corresponding indicated historical performance level(s), or be suitable for you or your portfolio. Due to various factors, including changing market conditions, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this newsletter (article) serves as the receipt of, or as a substitute for, personalized investment advice from Searcy Financial Services, Inc.

The content of this letter does not constitute a tax or legal opinion. Always consult with a competent professional service provider for advice on tax or legal matters specific to your situation. To the extent that a reader has any questions regarding the applicability of any specific issue discussed in this content, he/she is encouraged to consult with the professional advisor of his/her choosing.  

Published for the blog on December 15, 2016 by Searcy Financial Services, your Overland Park, Kansas Fee-Only Financial Planner and Investment Manager.