How to retire with confidence amid financial volatility
Cheryl Krueger discusses retirement amidst financial volatility.
by Cheryl Krueger, President, Growing Fortunes Financial Partners
I wonder how many times the term “roller coaster” has been applied to the stock market over the past five years in retirement discussions? It does seem that many people are ready to simply avoid the turmoil of the stock market, hoping to stay ahead of losses by moving their investments to cash or the post-downgrade-somehow-still-a-safe-haven U.S. Treasury market.
Volatility is scary. Talk show radio hosts, TV investment show hosts, and the ubiquitous “end of the world” investment newsletter “experts” have latched on to this fear and are increasing their audiences and their profits by selling a bunker mentality. Particularly hesitant to rejoin the stock market fray are those at or near retirement. Clients tell me “I can’t afford to gamble with my retirement account”, or “I just want to know how much I can spend.” And yet, many can’t afford to settle for the safe investment returns on CDs or high-interest savings accounts. So what is a retiree to do? Here are three issues to consider while on this financial roller coaster:
- Knowledge is extremely powerful. The 2011 Retirement Confidence Survey published by the Employee Benefit Research Institute (EBRI) notes that most workers are not aware of how much they actually need to save for retirement. Only 42% of those surveyed reported that they or their spouse had calculated their “number,” or the amount that would be needed in retirement. As with most areas of life, understanding where the individual stands in terms of reaching their goals is critical.
Some pre-retirees are late in their careers without “enough” retirement savings. Preparing for retirement starts with understanding how they might adjust goals and lifestyle to meet their retirement income needs. When a pre-retiree sees that they need to spend less, or work a bit more, they’re able to make those adjustments. But it’s important that they know the situation before they make a decision like purchasing a second home or quitting their job. It’s too important to simply guess.
- Short-term volatility concerns must be off the table for retirees. Most informed investors have seen the target date fund asset allocation glidepath (see a sample here), where the stock component of a portfolio declines as the employee reaches retirement. However, once the retiree starts depleting their portfolio for income, it’s critical to have a strategy for accessing cash for short-term needs without market exposure. The same fact applies in retirement as before retirement: You don’t take a loss until you sell. Managing the portfolio as it’s being depleted is different from managing it as it’s accumulating.
- Retirees should have a plan for two mortality-related risks: the risk of dying too early and the risk of living “too long.” It’s important to know that a spouse will have enough income when, for example, Social Security and/or pension benefits are reduced after the death of a spouse, and it’s important to have a realistic estimate of life expectancy.
There’s much more to retirement planning than I’m able to include in a short blog post. I am happy to answer questions, though, left in the comments section. I’ll leave you with this – key to volatility management for many retirees is knowing that there is a plan in place to help volatility be a lesser concern than simply leaving retirement to chance.