HOW NERVOUS SHOULD RETIREES BE ABOUT MARKET?
TODAY’S FAQ ON STOCK VOLATILITY
After five straight days of stock market losses and the worst start to a year ever, no one could blame investors — especially retirees — for being queasy. While people years away from retirement may be seeing buying opportunities, those already out of the workforce, or nearly there, have a lot more on the line.
They need to take a breath, and possibly call their financial adviser for a little pep talk, says Dave Littell, retirement income program co-director at The American College of Financial Services, Bryn Mawr, Pa. Here’s more advice from Littell.
Q HOW NERVOUS SHOULD RETIREES BE RIGHT NOW?
A: Knowing the facts helps me get through turbulent times. Investments in stocks are important to the success of most retirement plans as returns on fixed-income in- vestments are so low today. Stocks over time bring higher returns and inflation protection. What comes with investing in the market is volatility — and market dips are part of the ride. Retirees who need to liquidate investments to meet their current income needs should consider cutting spending so that they can minimize how much they have to sell in the downmarket.
Q SHOULD THOSE PLANNING ON RETIRING SOON HOLD OFF?
A: When the market is up, people heading into retirement feel great about their prospects. The reality is when stock prices are high — that’s when you have to be most careful about how much you withdraw from your investments in retirement — because the market will come back down. The opposite is also true. When the market is down you can actually afford to withdraw a higher percentage — because guess what? The market will come back. All that is to say that there is no perfect time to retire. Remember, you are going to be liquidating your investments over a very long period of time.
Choosing when to retire requires a carefully thought-out plan. You need to have a clear understanding of what your retirement lifestyle will cost and do calculations to determine if you have sufficient resources to meet your expenses. What the current volatility does remind us is that a retirement income plan needs to have a strategy for weathering ups and downs in the market. One simple approach is building an income floor with Social Security, pensions and commercial income annuities that are paid regardless of market performance. With enough steady income, you are less dependent on portfolio withdrawals and you can still afford to take risk in your portfolio and still sleep well at night.
Q IS IT WORTH A CALL TO YOUR FINANCIAL ADVISER?
A: If you are concerned, yes, absolutely check in with your adviser. Discuss your concerns and ask your adviser to go over how the plan addresses volatility. Besides the income flooring strategy, other strategies include keeping a cash reserve that can be tapped when the market is down, and dedicating low-risk investments to meet your upcoming income needs. We did a recent survey of advisers who have the Retirement Income Certified Professional designation from The American College and they said they spend a lot of time talking with their clients during turbulent moments — they see it as part of their job. This is one of the main reasons you hired an adviser!
Q WHAT IF I DON’T HAVE ONE?
A: There are different types of retirees who don’t have an adviser. There are some do-it-yourselfers who have educated themselves about planning and make their own investment decisions. These retirees should stay the course, although this may be a good time to re-evaluate whether the plan does a good job of addressing volatility. Then there are those who muddle along without a lot of knowledge or planning.
I think that they are the most vulnerable in a significant market dip like we are having now. I would encourage them to find an adviser or at least seek out education about proper planning before making any decisions about what to do next.