How To Help Protect Your Retirement Savings from Volatility

Markets never stop moving. Bull markets, bear markets, and every investment season in between are constantly in motion. As an investor, you’re probably aware of how common the ups and downs of the markets are—even if you’re feeling confident about markets overall and enjoying gains over the long-term.

The truth is that market volatility is seemingly ever-present when investing, so understanding and properly managing it is the best way to pursue success. In some cases, market volatility can work to your advantage.  This article shares tips for protecting yourself during periods of high volatility and preserving your hard-fought retirement savings.

Understand the Various Types of Retirement Accounts and Their Risks

Retirement accounts for most people are a foundational portfolio strategy. Not only do they enable you to avoid capital gains taxes when you sell an investment at a profit (or incur taxes for receiving dividends), you may be able to maximize the benefits from your ongoing deposits, too. 

When used effectively, they can help you ride out volatile periods in the markets. Here’s a crash course on basic retirement accounts.

 

Pre-Tax Retirement Accounts

For pre-tax IRAs like traditional IRAs, SEP-IRAs, and non-Roth 401(k)s, every dollar you deposit into them is protected from income during that tax year. That’s up to a certain limit based on the account type and your age

Pre-tax accounts give you the benefit of investing pre-tax deposits every year. You’re only required to withdraw the funds when you’re 72 years old. This is a taxable event–but it happens when you’re hopefully in a much lower tax bracket, in your 70s.

 

After-Tax Retirement Accounts

Contributions to after-tax retirement accounts like your Roth-IRA and Roth-401k(s) are not funded with pre-tax dollars. However, the tax benefits these accounts provide occur on the back end when you withdraw your funds from the retirement account. 

After-tax ROTH accounts don’t offer an income deduction, but they also are unique in that they don’t have a withdrawal requirement (ever). This means that all the deposits you make—and potential investment gains you generate—can be withdrawn completely tax-free. To qualify for the special withdrawal tax treatment, you just need to be older than 59 ½ and to have owned the account for at least five years.

Overall, it’s important to have a long-term viewpoint with your retirement account investments, especially during periods of volatility. Using your retirement accounts with a long-term perspective helps you mentally withstand short-term ups and downs, which are natural for the stock market.  In fact, those periods of rapid swings in market prices are a great opportunity to continue your regular investments, so that the classic “dollar cost averaging” math benefits work to your advantage.

Proper use of retirement accounts won’t just help your investments. It can also help you minimize your long-run tax burden when you withdraw money from your accounts.

 

Diversify Your Retirement Investments

One of the most straightforward ways to protect any portfolio is to diversify. Your retirement investments are no different. If your portfolio isn’t diversified, periods of high volatility will cause your portfolio values to swing wildly. 

Even more concerning, if the markets experience a significant correction, you might see your retirement account balances plummet. This can cause you to feel the need to sell your investments well before you originally planned to.  This is almost always a mistake.

Selling after a steep decline means that you’ve bought high and sold low–the opposite of sound investing. Diversification, conversely, is the distribution of investment assets across many different asset categories. At the core of diversification is the understanding that asset classes tend to not move in tandem. 

For example, when stocks are rising, this shows that investors are feeling confident about the future and are comfortable taking on a bit more risk. In this case, bonds (which pay a fixed rate of interest usually lower than stocks) may become less attractive. As a result, their prices probably will not keep pace with stocks.

On the other hand, if investors are feeling very uncertain about the future, they pile their money into bonds, causing bond prices to surge. They often sell their stocks as well, which can send stock prices down.

To this end, diversifying your portfolio to match your risk tolerance helps you capture gains on the upside. It can also cushion your portfolio if markets decline.

 

Review Your Portfolio Regularly to Ensure It’s Aligned with Your Risk Tolerance

Risk tolerance is the degree of change in investment returns that an investor can withstand before deciding to change their investment strategy. It varies from investor to investor because it is directly based on their financial priorities, their personality, and more.

It’s very important that your portfolio, risk tolerance, and financial goals are all aligned. So, it’s best to review your portfolio after any new life event, like a job change, family change, or relocation. Any positive or negative event that can directly affect your finances necessitates it. 

Suppose that you are planning to start or expand your family: This might mean that you want to reduce your portfolio risk for a time. In this case, your risk tolerance has shifted to a more conservative level. Therefore, your portfolio should follow. 

If you know that your retirement portfolio targets your financial goals and is aligned with your risk tolerance, you can maintain more peace of mind during periods of market volatility.

 

Take Advantage of Employer Matching Contributions Whenever Possible

Employer matches are a great financial boost to those who have them. If you’re eligible to receive one, it only makes sense to maximize it. Many financial experts call employers matching employee contributions “free money” and in a sense, they may be right. 

Those additional funds not being taxed, do not require extra hours of work, nor do they have any other requirements besides participating in your employer-sponsored retirement plan. While markets ebb and flow, the employer match is an additional boost to your savings that you can easily receive on an annual basis. If you’re eligible for one, make the most of it if you can.

 

Watch Your Investment Costs and Fees Closely

Watch Your Investment Costs and Fees CloselyA properly managed portfolio can significantly improve your investing. It can also help you maximize your wealth. Meanwhile, overpaying can whittle away at your portfolio’s gains. Although there is no ideal portfolio fee, every dollar you're paying should translate into the extra value you’re getting from your financial advisor or investment strategy. 

If your portfolio is modeled by a robo-advisor (fully automated; without access to much human interaction), your fees should be less than a service where you have an actual advisor to work with. A typical financial advisory fee is around 1% of your portfolio value annually. Nevertheless, this can vary, based on your balances.

When speaking to your portfolio manager, here are some helpful questions to ask:

  • Is my portfolio mostly mutual funds, ETFs, or individual stocks?
  • What are the underlying fees for the mutual funds (if any)?
  • How much cash does my portfolio hold? Does it generate interest?
  • How often do we have portfolio reviews—and how often can I call you?

Asking these won’t just ensure that you’re making the most of your retirement portfolio. Doing so should also help to develop mutual trust between you and your advisor. That can serve you significantly in the long run.

 

Consult a Financial Advisor About Protecting Your Retirement Savings

Here’s the good news: you don’t have to go it alone. Managing your financial life alongside your career, family, or personal life isn’t easy. But, your financial advisor is your best financial resource. We can serve as an invaluable ally along your wealth-building journey.

Rather than making educated guesses (or making financial decisions without a financial expert’s help), work with Linscomb & Williams. As a full fiduciary financial advisor Houston can rely on, we can make managing your retirement investments much easier during periods of volatility. Contact us today. 

 

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Lauren Rich, CFP®

Lauren Rich, CFP®

Lauren Rich is a Managing Director and Wealth Advisor for Linscomb & Williams.

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