The unpredictability of financial markets can disrupt even the best-laid retirement plans. Here are our top ten strategies to consider when retiring in a volatile market.
Navigating retirement savings during volatile markets can be unnerving. Fortunately, planning ahead can go a long way toward helping you protect your retirement when market volatility hits. And Americans are understandably anxious.
According to the 2023 Retirement Confidence Survey by the Employee Benefit Research Institute, retirees’ and workers’ confidence of having enough funds for a comfortable retirement has fallen to the lowest level in five years.
Moreover, the magnitude of the decline in confidence was last seen “in 2008 during the global financial crisis,” according to the survey. Nearly seven in 10 retirees are concerned that the rising cost of living will make it tougher for them to save money, and 30% are not confident their money will keep up with inflation in retirement. Only 27% feel very confident they will have a comfortable retirement.
However, your retirement should not be fear-led. If you already have a set budget for retirement, a down market could mean you’d be tempted to sell more investments to raise the same amount of money to live on. But cashing out more securities than expected also means you could have a smaller retirement fund for the future.
To prevent emotionally-charged money moves, let's explore retirement-saving strategies you can implement during volatile times. Here's what you need to know.
Focus on What You CAN Control
One of the most crucial steps toward securing a financially stable retirement is to figure out where you currently stand. Then take action where you can.
Throughout your investing journey, it's important to recognize that there are variables you have no control over. The ups and downs of the markets are out of your hands, so it's best to spend your time and energy on the aspects of investing you can control, such as:
- How much you save
- How much you spend
- Your asset allocation
Focusing on these areas will support your investing goals and give you peace of mind as your retirement date nears.
Invest for Income
A rule of thumb in volatile markets is to have patience: If you can ride out the market’s ups and downs, asset prices should eventually recover. Unfortunately, retirees don’t always have the luxury of time. If you’re retired or approaching retirement, you may need to tap your investments for income when markets are volatile, potentially locking in losses that can impair your portfolio for the long term.
One approach to mitigating the vulnerability of your retirement plan to market volatility is to contemplate investing in investment-grade bonds and stocks that offer dividends. By doing so, investors may receive regular income from these investments to support their spending requirements, while preserving the principal investments—at least until the market rebounds.
Nevertheless, it is important to consider the drawbacks. Certain companies may decrease or halt dividend payments during extended periods of market volatility or economic hardship. Additionally, depending on the size of your retirement savings and your regular expenditure needs during retirement, the income generated from high-quality bonds and/or dividend-paying stocks may not be adequate for sustenance.
Dollar Cost Averaging
Have you considered using dollar-cost averaging to build wealth over time? Dollar-cost averaging helps minimize the impact of volatility when investing as contributions are spread over time instead of invested as a lump sum.
Dollar-cost averaging requires the investor to invest the same amount of money in the same stock on a regular basis over time, regardless of the share price. The number of shares purchased each month will vary depending on the share price of the investment at the time of the purchase. The idea being when the share value rises, your money will buy fewer shares per dollar invested. When the share price is down, your money will get you more shares. Over time, the average cost per share you spend should compare quite favorably with the price you would have paid if you had tried to time it.
Annuities present an alternative method to help ensure a dependable income stream, potentially minimizing or eliminating the need to sell high-return assets from your portfolio during market turmoil. Moreover, annuities with guaranteed income-protection benefits offer a fixed amount of income for life, designed to safeguard against the risk of depleting your savings.
However, it is important to acknowledge the drawbacks associated with certain annuities. Especially Variable annuities. Variable annuities carry several risks and potential drawbacks that investors should be aware of:
- They can end up generating significant taxes.
They usually come with high fees.
They are so complex that many who own them don’t understand them.
It is crucial for investors to thoroughly research and understand the risks associated with variable annuities and carefully consider whether the potential benefits outweigh these risks based on their individual financial goals and circumstances. Consulting with a financial advisor is recommended before making any investment decisions.
Maximize Your Retirement Accounts
If you have access to a 401(k) or other employer-sponsored retirement account, taking advantage of it is essential. These accounts offer tax advantages that can help your money grow faster. In 2023, you can invest up to $22,500 in a 401(k) plan. Once you turn 50, you become eligible to make additional catch-up contributions of up to $7,500 to your 401(k) plan, for a total of $30,000 you can temporarily shield from income tax.
Unlike simple brokerage accounts, your retirement funds grow tax-free in these accounts. Additionally, funding these accounts directly from your paycheck before deducting taxes can reduce your taxable income.
Several companies offer a Roth 401(k) option, which doesn't reduce your taxable income, but allows you to withdraw funds tax-free once you reach age 59.5, provided your account has been open for at least five years. You can use our 401(k) calculator to project your returns and understand how to meet your retirement savings goals.
Delaying Social Security
Social Security benefits are essential to retirement income, but they alone may not be enough to support you in your golden years. However, there are several steps you can take to maximize your Social Security checks. For instance, you may want to work longer or delay taking benefits as soon as you retire.
Your full retirement age depends on your birth year. It ranges from 65 to 67 years old, and it gradually increased over time from 1938 onward. If you were born after 1960, your full retirement age is 67. Delaying your Social Security benefits beyond your full retirement age can also increase monthly benefits up to age 70.
It's also crucial to plan accordingly with your spouse if you're married. If your incomes are vastly different, it may be a good idea to delay starting to collect benefits for the higher earner. That way, you can maximize your total benefits as a couple. You can also explore options such as spousal benefits and survivor benefits, which can provide additional income and support.
Our retirement income advisors can help you understand your Social Security benefits and create a comprehensive retirement plan that maximizes your retirement income.
Diversify Your Investments
Investing your retirement savings in one asset class, such as stocks or real estate, can be risky. Most financial advisors recommend diversifying your portfolio to reduce risk exposure. While investing always carries some risk, diversifying your portfolio with different types of investments can enable you to grow your wealth while mitigating the impact of poor performance by any one investment.
Here are the most common types of investments to consider diversifying your portfolio with:
- Mutual Funds
- Single Stocks
- Index Funds
- Real Estate
There are several ways you can achieve diversification within your portfolio. For example, you can invest in companies across various stock market sectors or companies of different sizes (large-cap, mid-cap, and small-cap). You can also diversify by investing in both domestic and international stocks.
By spreading your investments across various asset classes, you can reduce your overall risk while enjoying the potential for growth and income. At Agemy Financial Strategies, our financial specialists can help you build a diversified portfolio tailored to your unique goals and needs.
In the face of inflation and market volatility, adopt a flexible withdrawal rate that adjusts with the market. Instead of sticking to 4% whether your portfolio rises or drops, set a floor and ceiling on what you will take out. If the market is up 20%, that 4% withdrawal will bring in more cash than what you had budgeted, so set a dollar ceiling on what you will withdraw. If the market falls, set a similar floor, so you will not have to withdraw more than 4% on a smaller base to match your budget.
Plan For Healthcare Costs
Planning for healthcare expenses in retirement is essential, and Agemy Financial Strategies can help you explore options like long-term care and Medicare supplemental insurance to mitigate these costs. According to Fidelity, healthcare expenses for a 65-year-old couple can average as high as $315,000, making it crucial to prepare for these expenses.
A Health Savings Account (HSA) functions like a 401(k) for healthcare expenses. Contributions are tax-deductible, and earnings grow tax-free. You can make tax-free withdrawals from an HSA if the funds are used for qualified healthcare expenses. By opening an HSA, you can begin saving for future healthcare costs while enjoying significant tax benefits. Our team of professionals can help you develop a comprehensive retirement plan that considers your unique healthcare needs and expenses.
Get Professional Advice
Making the decision to retire is not an easy one, and market volatility and persistently high inflation make it an even tougher call to make. Professional financial advice is crucial when it comes to retirement saving strategies in a volatile market. A trusted financial advisor can help you create a personalized retirement plan that aligns with your unique needs and goals. They can also guide you through the intricacies of retirement planning and investment management.
At Agemy Financial Strategies, we offer comprehensive retirement planning services to help you achieve your retirement goals. We can help you create a retirement income plan that considers all potential sources of income, including Social Security benefits, pension payments, and investment income. We provide advice and guidance every step of the way, helping to ensure that you're equipped to make informed decisions about your financial future, whatever way the economy swings.
Our team of financial specialists can also help you explore various retirement saving strategies, including:
- Maximizing contributions to retirement accounts.
- Diversifying your investment portfolio.
- Planning for healthcare expenses.
We understand that everyone's retirement goals are unique, so we take a personalized approach to retirement planning to ensure your plan is tailored to your specific needs and objectives.
While it can be stressful to see headlines about threats to the value of your nest egg, a volatile market does not necessarily mean danger for your retirement plans. By working with Agemy Financial Strategies and implementing these retirement saving strategies, you can be well on your way to a comfortable and enjoyable retirement.