Retiring soon? Here’s how you should handle these crazy market drops
Investors have been on a roller coaster the past month, but near-retirees are probably wondering how they can get off the ride — and fast. Failing to do so could lead to a less-than-ideal nest egg in retirement.
The Dow Jones Industrial Average
is down about 20% since its Feb. 12 high, while the S&P
and the Nasdaq Composite
are both in correction territory.
Most investors are told to stay the course, especially if retirement is far away. But some people may not have time on their side, especially if they intend to retire within the next year or so. Individuals who enter retirement during a market downturn face a “sequence of returns” risk, which means they could potentially be withdrawing assets from their investment principals — not investment gains. When that happens, they can lose future returns.
Some clients have called with concerns, said Matt Bowden, a financial planner at RFC Financial Planners in Ann Arbor, Mich. But he, like many advisers, have drafted financial plans that incorporate the ups and downs of the market, and safeguards retirement assets for the long haul. Most financial plans, if done correctly, are meant to weather this type of market volatility.
Near-retirees worried about their nest egg have a few options, none of which include withdrawing all of their money or stopping contributions to their plans.
For starters, they should look through their financial plans and its assumptions to see how their investments are set up to handle volatility. They should not yet intend to make changes to their asset allocations in their portfolios, as selling when the market is down would inherently create “realized losses.” (Investors haven’t actually lost or gained money from their investments until they choose to sell them.)
This is also a good time to see how much of a portfolio or assets are in conservative funds or cash, said Alex Reffett, co-founder of East Paces Group in Atlanta. “I would recommend having five to seven years of cash flow in very conservative assets that aren’t affected by short-term market volatility,” he said. This way, “you will feel confident that you can ride out market volatility, even in serious recessions like 2008-09.” With this strategy, investors are withdrawing in the immediate future from these assets, leaving their investments in equities to rebound over time (and thus, deterring a real loss).
There are instances where selling some investments may be worth considering, said Rocco Carriero, chief executive officer of Rocco A. Carriero Wealth Partners in Southampton, N.Y. Investors who are extremely worried about their finances in the foreseeable future could talk to advisers about selling equities that would amount to about one year’s worth of expenses in cash. “Now you know for the next 12 months that you don’t have to worry,” he said.
Alternatively, some people may see this market volatility as a good opportunity to buy more in equities, while prices are down, and they can do that in multiple sessions. “Nobody knows where the actual bottom is,” he said.
Financial plans are meant to be unique to each individual investor, so it’s hard to suggest a “perfect” asset allocation for any near-retiree. Still, investors — and if they have one, their advisers — can take a second look at their portfolios to see where they stand and create “what-if” scenarios. “Hopefully, this is a wake-up call for anyone who has been trying to time the markets,” Reffett said. “You need to base your investment strategy on retirement goals and timeline.”
Another option: delaying retirement. For those who aren’t sold on retiring on a specific date and enjoy working, this is an opportune time to possibly hold on to a job, or find part-time work. Continuing to work could allow a person to postpone withdrawing from their funds, and boost contributions to accounts, which will eventually lead to more money in retirement. “That will absolutely increase your chances of having more assets in retirement,” Bowden said. “You are not touching your investments — you’re adding to them for a little longer.”