Does the Market 2-Step Dance Trip You Up?

If you like country-western music, you may well have attempted the traditional “2 Step” Dance to the music.  The pattern is two steps forward and one step back.  Some of us are dance-challenged and cannot seem to master the dance without tripping up along the way.  That’s a pretty good description of investor behavior of many people.

Market volatility is often defined as the size and frequency of swings in the stock market, up and down. While the prevailing trend is forward, occasionally the market steps backward.  Stock prices fluctuate constantly, but during periods of significant volatility, the swings deepen in magnitude, and become more frequent. It is sort of like the cadence of the music increasing during the dance.  Volatility has likely been top-of-mind for investors in 2022.  The only certainty has seemed to be uncertainty during the calendar year.  

In fact, the S&P 500 index entered bear market territory, defined as a drop of 20 percent or more, in early June of 2022. This volatility on the downside can pose a risk to retirement savings. Drops in the value of your retirement portfolio can leave you feeling you will not have enough to live on or cause you to postpone your retirement date. If you’re already retired, you may feel a pinch in your income.

Is market volatility the greatest risk to your retirement? Well, frankly, it’s certainly a risk. But while there are several risks to watch out for: it’s far from the only one. It may very well NOT be the most important.  Having a good sense of all potential risks and managing them are keys to successful retirement planning. 

 

What Are Some Other Risks to Retirement That You Should Be Aware Of?

Let’s briefly discuss the risks to retirement. The first is not saving enough. It’s never too early to discuss how much you need to save with a full-fiduciary financial advisor.  We advise always looking for advice from advisor who will attest in writing that they will be your legal fiduciary in any and every business interaction with you. They can help you project what you need to save by estimating your retirement income from all sources.

These sources can include tax-advantaged retirement funds like 401(k)s and Individual Retirement Accounts (IRAs), Social Security benefits, and any pensions or other potential income from your outside after-tax savings. 

The second risk is not allocating the assets in your retirement portfolio appropriately for your goals and other factors (such as your age). A fiduciary advisor will discuss your goals with you, planning for how you should appropriately allocate your invested assets.

Portfolios are usually divided between asset classes such as stocks, bonds, and cash. For stock investors seeking more robust returns, they should be mentally and emotionally prepared to weather short-term price fluctuations. Crucially, however, stocks have historically appreciated the most of any asset. Over the past century, stocks have, on average, posted a return of 10 percent per year—and that’s counting living through the inevitable periodic bear markets. 

Bonds and cash, historically, return much less per year. But bond prices are more stable than stock prices, and cash prices are the most stable of all, with no fluctuation. Bonds and cash are generally included in a portfolio for stability. 

These more conservative assets help counter the potential volatility of the stock market while also reaping some interest. Stock market swings can be offset somewhat by fixed income securities and cash or cash-equivalent holdings. It's generally a good idea to increase your bond and cash holdings gradually as you approach retirement, in order to prepare for the years when you have to begin living off of your assets.

Stocks are still important, however, even for most retired individuals, because of their return potential.  If you are planning to retire within ten years or are already retired, discuss your asset allocation with a fee-only fiduciary advisor. 

Remember, though, that young people encounter an entirely different risk.  If they don’t participate in the stock market enough, they are unlikely to see their money appreciate. A 25-year-old has plenty of time to recover from a bear market and see assets appreciate over the next 40 years. However, a 75-year-old may lack the convenience of such a long runway.

The third potential risk is not being diversified within your asset classes. The more you diversify your stock and bond holdings, the less risk you run of taking a major hit on any one investment. 

 

How Can You Protect Your Retirement Savings from Market Volatility?

There are several methods to protect your retirement savings from market volatility. The first is what we’ve already outlined - prudent asset allocation, a mix of stocks, bonds, and cash appropriate to your age and goals. The second method, we’ve also mentioned, is prudent diversification within asset classes. 

There are some further nuances.  Stocks with above-average and stable-to-growing dividends, for example, often decline less than other stocks in a bear market (and sometimes even stay flat or rise modestly in the face of a bear market). In environments of increased inflation or rising interest rates, such dividend-oriented stocks have historically tended to fare better than their cousins with relatively modest or even no dividends.  A mix of dividend stocks and other ETFs which span a mix of sectors and industries can mean that you’ll avoid taking a hit on any one stock or one out-of-favor industry.

The third method for safeguarding against volatility is behavioral and that is to avoid panic selling. Unfortunately, some investors see stock market price charts heading down steeply and think, “Sell now!” to avoid yet further drops in price. In our 50+ years of advising families, we’ve certainly heard this sentiment expressed more than once by clients feeling alarmed. However, that’s almost always a path to be avoided.  Often, by the time you are feeling such inclination, the better part of the “damage” may already have happened. Selling at that point turns a paper loss into a real economic loss.

Why? Because historically, bear markets end… and the market climbs upward again. If you still have your stocks, they’ll likely regain their value and go even higher. But if you’ve sold them, you’ve lost the opportunity to benefit from an upturn.

 

How Can You Plan for These Risks so That Your Retirement Savings Are Protected?

Discuss your retirement plans with a fee-only fiduciary wealth planner. They will want to know what your goals are since those affect the amount of money you’ll need in retirement. Next, discuss your risk tolerance with them. 

How Can You Plan for These Risks so That Your Retirement Savings Are Protected?

Does volatility keep you up at night, or do you recognize it as an expected part of being in the stock market? The Chairman of our Linscomb & Williams Investment Committee calls accepting this volatility the “price of admission” to investing for higher returns in stocks.  Your L&W fiduciary wealth advisor can work with you on protecting your retirement savings, managing it for maximum appreciation, and helping you save enough.

What Should Retirees Do?

If you’re already retired, the hard truth is that your nest egg may be worth less than it was a few months ago. If you withdraw a percentage each month, for example, and the total amount drops, the monthly amount drops as well. 

So, what should you do if market volatility or other risks, such as high inflation, result in less retirement income than you planned? The good news is that you have a number of options. 

First, review your cash flow, examining both income and expenses. Do they match comfortably (that is, do you have more income than expenses)? If you need to cut back a bit, can you?

Second, consider methods for reducing expenses. You might want to downsize from a large house to a smaller one, for example, or move to a state with a lower cost of living and lower tax burdens. Third, consider ways of raising your income. You might, for example, decide to go back to work, either full or part-time (or maybe start a business).  Examine your balance sheet for “dead” assets that do not produce income.  Can you sell these and convert the proceeds to a form in your portfolio that will add to your investable base?

If you haven’t yet taken Social Security benefits, consider taking them earlier than you had planned to augment your income if you are living through a severe bear market. You can take them between the ages of 62 and 70. At the same time, the amount is reduced if you take them between 62 and the year that you hit full retirement age (FRA; as determined by your birth year).  Your L&W wealth advisor can help in this decision by “running the numbers”.

The amount of your Social Security benefits will increase roughly 8 percent every year between FRA and the age of 70. Both reductions and increases are permanent. Our professional team can work with you on your monthly cash flow and options to increase income and decrease spending.

Especially if you got here by searching on the web for “retirement planning  Atlanta” or “financial advisor Atlanta,” contact us today to learn more.

 

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MaryJane M. LeCroy, CFP®

MaryJane M. LeCroy, CFP®

As a member of our Atlanta team, MaryJane M. LeCroy is a Managing Director and Senior Wealth Advisor for Linscomb & Williams.

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