What a turbulent market means for your retirement
No one could have predicted how the 11-year bull market would end: a global stock market sell-off caused by a virus and an argument between Russia and Saudi Arabia over oil output.
No one could have predicted how the 11-year bull market would end: a global stock market sell-off caused by a virus and an argument between Russia and Saudi Arabia over oil output. But it has happened.
The bear has awakened and has put the old bull out to pasture.
A bear market is defined as a 20-percent-or-more drop from a peak. Fortunately, this one (technically) lasted only three days. But given the global economic crisis right now, no one knows when the bear might once again return.
One thing is clear—we live in uncertain times. And neither markets nor humans respond well to uncertainty.
But let’s take a breath, take stock of where we are, and look at what actions we can control to better prepare us to live out our retirement dreams.
To do that, you should look at three questions:
- What portfolio components have not been impacted?
- What do I have to do to my retirement portfolio?
- How can I mitigate any damage done and get back on track towards my planned retirement?
What portfolio components have not been impacted?
Some components of your retirement portfolio will not be affected by a bear market or a bull market. These are mostly instruments designed to provide a guarantee of principal or a steady source of retirement income. They can include:
- Cash equivalents, money markets, and CDs
- Treasury securities (excluding short-term bonds)
- Fixed and indexed annuities
- Defined-benefit pensions
- Social Security
- Real Estate
What do I have to do to my retirement portfolio?
Portfolio management is always a dynamic process that we want to re-evaluate regularly. But the recent stock market crash may have triggered the need to revisit your retirement portfolio now.
If you are in or nearing retirement, your timeline likely makes you a conservative or very conservative investor. Your asset allocations into stocks, bond funds, mutual funds, commodities, real estate, and other alternatives should reflect your desired level of risk.
You will want to look at that asset allocation again, in the context of how the world looks today.
The market volatility and the Coronavirus pandemic may have caused you to question how your risk tolerance has changed. What has happened to your portfolio? Your various asset levels? Your time horizons? Your income objectives? What strategies makes sense while things are still volatile?
If your retirement plan had your investments correctly diversified and allocated, not all of your investments would have been impacted to the same extent. And hopefully, the equity allocation was appropriate for your age
“Sticking with the plan” is not the same as “do nothing.” Volatility can bring with it opportunities to be proactive, and to take advantage of market disruptions. Rebalancing, considering Roth conversions, and Tax-loss harvesting are all ways that can make a volatile market work for you.
How can I mitigate any damage done and get back on track towards my planned retirement?
Your retirement portfolio’s exposure to the bear market may mean you want—or have—to take some actions to reinforce your financial position. Here are some options.
Work longer. If you’re still working but planning to retire soon, you may want to consider staying on a while longer. You will start tapping into retirement savings later, so they’d last further into life. And you could continue adding to your nest egg instead of drawing it down.
But even if you have retired, you may find ways to put your skills to use part-time or project-based once the pandemic ends and the economy ramps up to meet pent-up demand.
Either one would help you recuperate faster from any losses.
Tap other assets. If you have a few years’ living expenses in cash, you can avoid touching long-term assets while their value is low. Otherwise, you face ‘sequence-of-return risk,’ or drawing down assets from a depleted portfolio early in retirement—especially in the first years. Even with a strong rebound, catching up would be difficult, and your assets might not last as long as you need.
So, if cash isn’t available, look for it in other places: perhaps a life insurance policy, a reverse mortgage, or a home-equity line of credit. They all have their pros and cons but are worth exploring.
Downsize your home. Had you thought about downsizing your home in retirement? If selling and then buying smaller unlocks some leftover cash to carry you through this turbulent time, this might be the time to do so.
Cut your expenses. When a significant market disruption or bear market occurs, cutting back temporarily on spending will lessen what you have to withdraw from your weakened portfolio. Many expenses (such as mortgage payments) may be fixed, though, which will make cutting more difficult.
You might be able to forgo the annual inflation adjustment you make to the withdrawal rate: the percentage you withdraw from your portfolio each year. Taking less now may allow you to take more when stock market prices are back up and will help sustain your portfolio.
Lock in lifetime income. If stock prices increase after the economy gears back up—and if your appetite for risk has dwindled—you may want to think about moving your money from stocks into an annuity. You may be walking away from more upside, but you will also be protecting yourself from future stock market downturns.
Keep contributing. Are you still working? Keep adding to your retirement savings. The 2008–2009 recession showed us that stopping contributions to 401(k) or similar workplace retirement plans left those investors way behind the ones who continued contributing.
Maximize your Social Security. Now is the time to examine every possibility to maximize the lifetime benefit of this valuable asset. Here are four:
- Delay claiming Social Security as long as you can afford to. Every year you wait means 8% more in monthly benefits.
- Keep working if you don’t have 35 years of contributions, or you have some low-income years. Both actions will increase the size of your monthly check.
- If you’ve claimed before reaching Full Retirement Age (FRA) and you still work, the Earnings Test may cause some payment holdbacks. But these will be added back when you reach FRA and will increase your Social Security checks for life.
- Identify the best possible claiming strategy between you and your spouse that lets one of you maximize your benefits; remember that whoever is the surviving spouse will have access to the highest of the two benefits checks.
Explore a Roth conversion. One lemonade-out-of-lemons strategy is to convert traditional retirement accounts—IRAs and 401(k)s—into a Roth at this time. It is an effective tax-saving strategy because:
- You pay income taxes on today’s reduced value of the shares in your original IRA.
- You benefit from lower tax rates thanks to the Tax Cuts and Jobs Act of 2017 (TCJA).
- Other losses incurred elsewhere may lower your tax bracket.
- You benefit from tax-free withdrawals in retirement and tax-free growth in the future.
Things to watch for:
- Check that the conversion doesn’t push your income up high enough to raise your Medicare Part B (medical insurance) and Part D (prescription drug) premiums in future years.
- If you don’t have the cash to pay the taxes triggered by the conversion, but take them out of its proceeds, you will lose some of the transaction’s efficiency.
- Be sure the strategy works for you; the TCJA ended Roth do-overs, and they can no longer be re-characterized or undone.
If you want to learn how the current market downturn will impact your ability to achieve your goals—and how to still live out your retirement dreams—start a conversation with one of our financial advisors today. We’re here to help.