Nearing Retirement in A Volatile Market
Over the last few months, we have seen various ebbs and flows. People are uncertain about the economy, the stock market, and their own portfolio. Perhaps the most nervous group of people is those nearing retirement. However, things are changing quickly which means we are not completely doomed. Rather than worrying about things we cannot control; we can look at some questions you may have.
Rebalancing Your Portfolio
With so many wild swings, is it an appropriate time to be rebalancing? Due to these swings, your asset allocation has likely shifted. Some investments in your portfolio will gain and lose quicker than others. If your financial goals and time horizon have not changed, you likely want to maintain the original allocation. This would require rebalancing.
Rebalancing a portfolio may cause investors to incur tax liabilities and/or transaction costs.
Also, you may want to consider a target-date fund. This could potentially balance the need for stability and gains. The allocation for a target-date fund is based on your time horizon. The holdings in the fund are automatically adjusted as you get closer to retirement.
The target date is the approximate date when investors plan to start withdrawing their money. The principal value of a target fund is not guaranteed at any time, including at the target date.
The 4% Rule
The 4% rule is a measurement used to calculate how much is needed for retirement. It shows you how much to withdrawal each year for expenses. The goal is to avoid depleting funds for at least 30 years through bear markets and periods of high inflation.
For example, if you have $1 million saved, you can withdraw $40,000 the first year. Each subsequent year increase this amount by the prior year’s inflation rate to preserve your buying power. If the inflation rate during your first year of retirement is 2%, the second year you would withdraw $40,800.
The 4% rule has been around since the 1990s, but is it still relevant in today’s world? There have always been critics of the theory. Some believe the 4% withdrawal rate is too high and 3.5% is a more conservative number. Others argue that 4% is too stingy and 4.5% would be more reasonable. Controversy aside, the 4% rule serves a valuable function. It is a simple starting point for retirement planning and a good starting point for your first year of retirement.
Retirees should review their withdrawals each year. Spending does not always increase each year at the rate of inflation. Withdrawal rates should be recalibrated every five years to identify if any adjustments are needed.
Asset Allocation and a Bear Market
There are various opinions on what constitutes the appropriate asset allocation for those near retirement (or in the first few years of retirement). These include:
- A 50/50 stock-bond split for those within 10 years of retiring.
- Starting retirement at 60% stocks, 35% bonds, and 5% cash equivalents- then decreasing stocks to 20%, increasing bonds to 50%, and moving cash equivalents to 30% by the age of 80.
- Subtract your age from 100 (or 120 depending on life expectancy) and that number determines the stock percentage. For example, if you retire at 65, stocks should make up between 35 and 55% of your portfolio.
Younger investors with long time horizons are advised to leave their allocation alone during downturns in the market. One could even use dollar-cost averaging to invest more. These decisions are riskier for those getting close to retirement.
Dollar cost averaging involves continuous investment in securities regardless of fluctuation in price levels of such securities. An investor should consider their ability to continue purchasing through fluctuating price levels.
Now is not the time to take unnecessary risks. Do not try to recover losses by dumping more money into riskier investments, especially with money that need for living expenses.
If you feel your portfolio is currently over-weighed towards stocks, it may be a good time to consider increasing the percentage of bond funds or other income-producing investments.
Keep things in perspective. Tune out the daily fluctuations in the market. Even if you are retiring in weeks, you probably won’t cash out your entire portfolio in the beginning. You may retain the bulk of your portfolio for another ten, twenty, or thirty years.
You cannot control the market; but you can control your spending. If you are nervous, focus on cutting expenses rather than checking your 401k balance each day.
We have worked with hundreds of clients nearing retirement. Most of them are excited and looking forward to this new chapter in their lives. While they are thrilled about the prospect of extra time on their hands, most of them generally enjoyed their jobs.
Not everyone skips into their office each day, but generally they enjoy their jobs. We have heard this from our clients. I am willing to bet my experience is not unusual.
If your portfolio has taken a beating or you are feeling anxious about the timing of your retirement, you might consider working for an additional year or two. Not only will you still be bringing in an income, but you can contribute additional money to your retirement accounts via catch up contributions. Hopefully, this will buy you some time for your portfolio to bounce back.
This Is Why We Plan
When you and your CFP® work on a plan to meet your financial goals, retiring in a volatile or bear market would be included in that plan. Bear markets are not uncommon. In the past 75 years, there have been 13 bear markets. This averages out to roughly one every 6 years. These conditions are not unexpected from a market standpoint.
We planned and stuck to the plan. And that is what we’ll continue to do.
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Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. No strategy assures success or protects against loss. Investing involves risk including loss of principal.