If you take a look at the stock market over the past 50 years you will see that the market goes up and the market goes down, and as far as anyone knows, this will continue on indefinitely. Whether you are a younger investor with time on your side or someone who is near or even in retirement, you need to have a plan to help manage your investments and to make the most of them for the longest possible time.
Knowing your risk tolerance is important since we expect that there is going to be some market volatility over the coming year or two. There are many uncertainties right now that will affect the market and you need to understand how these market fluctuations will impact your future.
Obviously, the sooner you begin investing, the better off you will be by the time you retire. However, even if you haven’t begun investing until later in life, your professional advisor should be able to steer you in the right direction for your particular financial situation and risk tolerance.
Investing always comes with varying degrees of uncertainty and as more mature investors look to the future, they may regard risk differently. So what are some strategies for handling risk near and in retirement that some experts suggest?
- Wait longer to take social security
If you don’t need the money to live on, consider delaying taking your social security for several more years. You will get a much better financial impact than if you start withdrawing at 62.
As an example, consider a 62-year-old with a life expectancy of 90 who began collecting a $1,400 monthly check. If he or she had waited to begin benefits at age 70, with the same life expectancy, the 62-year-old would have received an additional $124,800 in real benefits — not factoring in cost-of-living increases — and would break even at age 80 and five months, he said.
- Consider downside protection
How do you assess your own personal risk? When facing choppy markets, Christine Benz, Director of Personal Finance and Retirement Planning for Morningstar advises retirees to perform a simple “back-of-the-envelope” estimate of the living expenses they would typically draw from their portfolio. Ideally, she said, retirees should keep one to two years of portfolio withdrawals in an easy-to-access cash position in order to avoid selling long-term investments at an inopportune time.*
Of course the closer you are to retirement, or if you already are, you don’t want all of your money in high-risk investments and should probably start to move your money into more conservative choices. As you get older you should discuss with your advisor the best way to rebalance your portfolio so you are comfortable with the amount of risk you carry and the amount of cash you have on hand.
- Consider flexible withdrawal rates
The sequence of bull and bear markets can have an overwhelming influence on overall portfolio health, especially if you are retired or semi-retired and no longer adding to your savings account. The key is to be sure you don’t withdraw too much money in any one year and consider inflation and possible increased tax liability.
If you can adhere to taking less money out in a bear market and adjust your withdrawals as the market improves, you can hopefully maintain a robust portfolio throughout your retirement.
- Examine your current debt
While world politics, wars, and unexpected catastrophes like Covid-19 are completely out of any investor’s control, personal debt is entirely within our realm. Examine your annual fixed expenses and review how much money you will have available from your investments and other income sources. Then make some decisions about where you can be flexible. Perhaps put off an expensive vacation or large purchase in a year when the market is lower and your retirement withdrawal may be less. In the longer term, perhaps consider moving to a less costly area of the country so that your retirement income will go further.
- Don’t check your account every day
How do you feel when you check your investment account and see that it is up? You most likely feel elated and probably think, “Well I made the right choice”. But then you check again and your portfolio is down. Your gut instinct is to want to get out…sell and be done with this bad decision.
Remember that until you actually take your money out, the ups and downs you see are merely transactions on paper. So if you feel confident that you and your financial advisor have prepared a good strategy and you have been investing wisely for the long- term, stay with your plan.
Most everyone goes through a bit of turmoil at some point about whether they made the right choices in their financial plan, especially when they are nearing retirement or already retired. The truth is if you have been investing regularly over months, years, and decades, even a volatile market is not likely to upset your plan and might even work in your favor.
Of course, if you have any questions about your financial and/or retirement plans during this somewhat uncertain economic period we seem to be going through, or want to have a conversation about your next steps, please reach out to me by phone, at 732-623-2070 or email, email@example.com. I always welcome your comments and questions and look forward to speaking with you!