Seven Tips for Retiring in a Volatile Market
It’s no secret that the stock market has fallen in recent weeks. If you’ve noticed balances trending lower in your accounts, it may have spurred you to worry about the issues surrounding retirement in a volatile market. What happens if you’re within sight of retiring?
And what happens if markets trend down further in the future? How can your retirement planning in Houston protect against volatility and better assure a comfortable retirement? These are all excellent questions. So, the following are seven tips from financial advisors in Houston, TX.
This article includes answers to these questions:
- Is a comfortable retirement still possible amid market volatility?
- How can diversifying your assets help protect your equity?
- Why is it extra important to plan ahead for retirement?
- Can knee-jerk reactions to bull markets hurt your portfolio?
- Should future taxes figure into your retirement plan’s budget?
- When do you reach your full retirement age (FRA)?
1. Plan Ahead
The foundation of all retirement planning is doing it before it becomes necessary. It always pays to plan ahead -- in good markets, volatile markets, and average markets. First, start saving as early as possible. Your early 20’s are not too young to start.
Over the years, despite periodic bear markets, the S&P 500 has returned roughly 10% per year. That is far more than any other liquid investment. So, the earlier you start saving for retirement, the more your money can work for you, through the appreciation of stocks and interest (for bonds and cash). Yes, stocks can be volatile. In the past 42 years, the S&P 500 stock index has provided positive returns in 32 of those years to produce that attractive average annual return. On the other hand every one of those 42 calendar years also experience periods where you must live through a decline, and on average those declines are 14%. Long-term, the market is a bit of an “uphill” roller-coaster ride. Starting the ride sooner is a huge advantage.
If you didn’t begin in your 20’s, don’t give up; start saving as soon as possible. If your employer offers a match on 401(k)s, it is important to take full advantage of it. The employer contribution is free money matching your own contributions. It offers tax advantages, as well. If you don’t have a 401(k) at work, Individual Retirement Accounts (IRAs) also offer tax advantages.
Next, think about what you’ll need in retirement. What are your retirement goals? How much money are you likely to need? Certain financial needs, such as your costs for commuting to work, will likely decrease . Other, like travel expenses, may rise if you plan to increase your travel after leaving the workforce. It is never too early to begin working with a pure fiduciary financial advisor to develop a plan for accumulating the needed funds to meet your goals.
2. Diversify Your Investments
Diversifying your retirement investments is always good advice. Don't put all your eggs in one basket. Why? Since all investment asset classes offer a mix of risk and reward you want to harvest the reward and minimize risk. Diversification helps minimize the risks.
Stocks, for example, offer higher rates of return than many other investment classes. On the other hand, the stock market also contains risk (of the kind of downturn and volatility we are addressing here). Bonds are far less volatile and typically offer steady interest. Fluctuations in bond prices and interest rates do occur, but are generally somewhat easier to stomach than those that occur in the stock market.
Another available asset class in retirement portfolios is cash, such as certificates of deposit (CDs). Cash instruments are incredibly low risk, as the principal almost never fluctuates. However, the interest has been on the low side, historically, for at least a decade. The risk with cash is that your return won’t outpace inflation.
A mix of stocks, bonds, and cash, however, can give you some needed stability of principal along with the opportunity for appreciation in the overall value of your retirement portfolios.
3. Stay Calm and Avoid Rash Decisions During Market Downturns
At Linscomb & Williams, we’ve been working with families and living through varied markets for more than 50 years. We know full well that it’s only human nature to feel some distress when the stock market falls. After all, your portfolios may become worth less than they were. Nevertheless, don’t panic and sell off stocks in the wake of a stock market decline, but instead, look at historical records.
Bear markets have always been followed by rising ones for almost a century in the U.S. In fact, the trend is not only to make up for a drop, but to reach new highs afterward. The great danger if you sell in the midst of uncomfortable market volatility is that you’ve effectively eliminated your chance to participate in any returns once the market’s skies clear. Often the strongest parts of a “bounce” in the market occur very shortly after we have hit the lowest point in the decline.
Selling in a downturn also means that you’ve lost your ability to participate in reinvested dividends. Put another way, you forfeit the chance to buy more of a good stock that has temporarily fallen in price. If you want to change your asset allocation to enhance stability and lessen your risk, discuss it with an L&W wealth management expert in Houston.
The key point is this: Avoid making a rash decision just because markets are volatile. The best investment decisions are long-term prudent ones; not spur-of-the-moment.
4. Don’t Forget About Taxes
Taxes will always be with us. They don’t stop in retirement, so you need to plan ahead for how you'll pay them during retirement (and beyond). In other words, paying taxes should be part of your retirement budget. Think about the tax bracket you’re likeliest to occupy at that point and work with a financial advisor to make sure you have sufficient funds allocated to cover it. Good planning considers the difference in your tax bracket while working and what it may be when you retire. And remember – your tax bracket may not automatically be lower when you retire.
Additionally, are your heirs likely to have estate taxes levied on them? There are numerous tax strategies for minimizing both your taxes and theirs. Again, discussing these with L&W’s wealth management team in Houston is likely to be a good idea.
5. Think About Where You’ll Live
Where you’ll live in retirement has major ramifications during a volatile market: will you stay in your current home, downsize or move somewhere else, entirely? It can help to run scenarios for your most likely plans.
What are your real estate costs likely to be under various circumstances? Will your existing mortgage be fully paid off when you retire? If you downsize or move, will the proceeds from your current home cover those costs?
What are your taxes (property, income, sales, and others) likely to be in each scenario? The cost of living varies markedly around the country and around the world. You should calculate major non-real estate expenses, such as healthcare, food, and travel, as well. Cost of living in retirement can vary significantly, for example between Houston, Texas and Honolulu, Hawaii.
6. Sharpen your Pencil on Social Security
Often, folks concerned with retirement planning focus on their retirement savings. However, don’t forget about Social Security benefits. You need to make sure you're maximizing them to coordinate with your plans. Although people become eligible for Social Security at 62, benefits are less than you’d receive at full retirement age (FRA), which is around 67 for most people in that category today.
In fact, they can vary by as much as 30 percent: Full retirement age is determined by your birth year. For example, it’s 67 for those born in 1960 and later. Conversely, if you wait until the age of 70 to receive benefits, the amount rises roughly 8% every year between your FRA and the year in which you hit 70.
In other words, if your FRA is 67 and you wait until you’re 70, your Social Security benefits could be 24% higher than if you’d taken them at 67. Both these reductions and increases, which are based on the age you take benefits, become permanent for you and a surviving spouse. A fiduciary financial advisor can help you analyze the decisions around Social Security to be confident that they are well coordinated with your gameplan.
7. Review Your Retirement Plan Regularly
It’s a particularly good idea to review your retirement plan periodically; at least once a year to make sure it still suits your needs. After all, your goals may change once you leave the workforce. Sometimes someone’s family size and composition change.
In other cases, your desire to work or run a business in retirement may not persist as you originally expected. Global changes may also influence your ability and desire to travel. These are just a few of the reasons why working with skilled and experienced investment managers at L&W in Houston can prove invaluable.
At Linscomb & Williams, we have the expertise (and decades of experience) to help make sure that your goals, plans, funds, estate planning, and budget fit your needs and maximize your retirement funds. Contact us today.