January of this year was the worst January for the stock market in the history of the market. Fortunately, February and March, for the most part, made up for those losses. But when the market is volatile, it can make investors nervous, especially those close to retirement, says Michael Fertig, AIF®, vice president at Fragasso Financial Advisors.
“There are a lot of pressures that are put on a certain group of pre-retirees today,” Fertig says. “Whether it’s paying for their children’s college education, kids moving back in or taking care of elderly parents — or some combination of all of those — it sometimes becomes almost impossible to fund your own retirement.”
Smart Business spoke with Fertig about retirement security during volatile markets.
What’s important to remember in times of volatile stock market change?
Investors need to be honest about their risk tolerance upfront, in order to elect a strategy that they can live with. That doesn’t mean you can’t adjust your strategy, but certainly one of the worst times to do so is in the midst of a volatile market.
You also need to work out a compromise with your spouse, if your risk tolerances are different. That might mean separate portfolios or finding a middle ground.
It’s a good idea to put together a worst-case scenario. Your adviser can go back to what your portfolio blend would have looked like in 2008. If it’s 70 percent stocks, 30 percent bonds, it might have been down 30 percent or X amount in terms of real dollars. What does that do to you? Do you lose sleep if you’re down that much? If yes, then you’ll want a slightly different mix.
Once you settle on a suitable asset allocation model to give you enough return to allow you to reach your goals with the amount of risk you’re willing to assume, the hardest piece is sticking with it. You can’t tear up the portfolio every time there’s a blip. When you look at events like Y2K, the tech bubble or 9/11, it always seems like this time it’s going to be a worse, longer and steeper decline. But every time the market has rebounded and come back stronger.
How can investors have retirement security, no matter what the market does?
Investors can’t always control their time horizon — a 20- or 30-year retirement is becoming the norm. In fact, of the babies born today, half are projected to live to 100 or older. The baby boomer generation is already starting to redefine what retirement looks like, with many working part time or doing consulting until they are 65 or 70.
Investors also can’t predict what the stock market will do.
What you do control are your savings. A lot of people don’t maximize the opportunities of their employer retirement plan. It’s also a good idea to increase your retirement savings every time you get a raise — get that money out of your paycheck before it gets into your hands.
Prior to retirement, you want to pay off as much debt as possible. Many pre-retirees borrow from their retirement plans to pay for college, especially if they didn’t start saving early enough. You may argue that if you borrow from your retirement plan, rather than having your kids take on student loans, at least you’re paying yourself back. That’s a legitimate, accurate and reasonable argument, but it doesn’t account for the time value of money. It will come down to personal preference, so have your adviser take you through what your retirement plan looks like in both scenarios. If you borrow from the plan, in most cases, it means having to redefine what your retirement looks like.
When you’re three to five years away from retirement, start getting serious about how much you’re going to need in terms of spending. Once you retire, it may change, so you’ll need to stay in regular touch with your adviser.
Also, decide how much of an emergency reserve you want to set aside that should never be invested — six months of living expenses, $5,000 or $10,000? If you keep several months of necessary distributions in cash, you’re not selling stock that’s already depressed and pouring salt into the wound.
One of the worst mistakes people can make is getting too conservative before they retire or as they enter retirement, because of how much life expectancies go up every year. That’s why, again, understanding your risk tolerance is critical.
Insights Wealth Management is brought to you by Fragasso Financial Advisors