Retirement and stock market volatility

​Retired and Facing Stock Market Volatility

If the recent stock market volatility has you spooked, you're not alone. The COVID-19 outbreak that has spread throughout the world, including the United States, has damaged global supply chains, completely depressed international travel and is likely to have a significant effect on many a company's revenues and profits.

But as the stock market goes through serious gyrations, bouncing wildly from day to day, individual investors will often over-react out of fear and sell their holdings to avoid further losses. That could result in selling off perfectly good investments that are still strong long-term plays.

If you are concerned about the effect that volatility is having on your investments and retirement funds, you can call us so we can help you devise a strategy that you are comfortable with. In the meantime, here are some tips to consider:

Resist the urge to panic sell

The problem with panic selling is that you will likely plan to get back into the market, and the same stocks you had before, when things settle down.

But most people are terrible at timing the market and, in order to profit from this strategy, you need to make two timely decisions:

1. When to get out of the market.
2. When to get back in.

 
If you get either of these wrong, it can hurt your financial situation rather than improve it.

Most people who choose to get out rarely get back in on time. This results in them missing out on rallies that are often part of a recovery. 

There is another consideration as well: If you have your money in a taxable account, selling will trigger long-term unrealized gains, so you'll take a tax hit that you could have deferred to the future.
 
Plan ahead

The key to successfully riding out stock market volatility or a downturn in retirement is to plan for it ahead of time. Some financial planners recommend allocating a few years of income in bonds, for example.

During market downturns, you can opt to remove the funds from your bond investments, which will not be affected as much by a stock market downturn ― and may even perform better.

So, during the years that stocks are down and recovering, you can sell bonds for your minimum withdrawals. In this way, you are selling investments that are up or down the least to meet your income needs.
 
Use multiple sources

Develop sources of monthly lifetime retirement income that don't drop if the stock market crashes. Use these "retirement paychecks" to cover your basic living expenses, or at least come close to doing so. Basic living expenses include housing, utilities, food, medical insurance premiums, and income and property taxes.

For a good majority of Americans, their Social Security check is the main source of income and fortunately, it's protected from stock market volatility. Try to live a life where this check covers most of your main living expenses. 

If you need additional retirement paychecks to cover your basic living expenses, consider using a portion of your retirement savings to purchase a low-cost immediate fixed-income annuity. Talk to us about what your options are.
 
Dial back on withdrawals

If you need to budget but have many of your funds in stocks, see if you can pay for your living expenses without tapping your 401(K) or IRA account. If you can leave it untouched and wait for the eventual bounce-back, you'll be better off since you won't be depleting your stock holdings.

So, you if you were considering removing a significant portion of your retirement account to cover upcoming expenses, you would lose money. If you can postpone that decision by tapping other funds that are not tied to the stock market, you could ride out the downturn and not be much worse off. 

If you have already started taking out funds from your 401(k) or IRA and are withdrawing more than your required minimum distributions, you may want to cut back to the minimum withdrawal instead in order to reduce the impact.