Two Keys To Navigating Volatility In Retirement

volatility

The following is a repost of my recently published Forbes article on market volatility that I felt was important to share with our audience. 

In the months since Covid-19 was declared a global pandemic, during which time the Dow Jones has seen the three worst point drops in U.S. history, I’ve had a lot of conversations with our clients about how to manage this volatility now that they’re retired.

When you’re young and in the accumulation phase of your life, you have time to recover when the market drops unexpectedly. But during retirement, when you’re in the distribution phase of your life, the equation changes. Having a plan to handle volatility is absolutely critical.

Thankfully, because of the planning we’ve done with our retired clients, very few of them have panicked and made rash decisions the past few months. In this article, I’ll share two key retirement plan strategies that can help you navigate market volatility. If you’re on the threshold of retirement, these strategies should lessen your worry about the uncertain future.

No. 1: Maintaining A Fixed Income

You have to prepare yourself for market corrections. They’re going to happen and will likely be unpredictable. Part of that preparation is setting aside money to cover your income needs.

I generally recommend having a minimum of five years of income needs in fixed income or bonds—investments that are considered to be stable and shouldn’t go down violently during difficult times in the stock market. This bucket of funds should be enough to carry you through the uneasy market corrections. A fixed amount you can depend on also insulates you from needing to sell investments at a bad time to have money to live on.

Five years is the minimum. Some of our clients have 20 years of income in fixed income, which makes it easier to view their equity investments as long-term money they don’t need to touch. We prefer basing this fixed income amount on what you need to live on rather than using some impersonal percentage. There’s a psychological power that comes from knowing your monthly needs will be met. If your needs are met, you’ll be in a better position to buy when the market is down and possibly take advantage of the growth when the market recovers.

If we’ve learned anything from market bubbles, it’s that you need a balanced portfolio. Never bet on one security. When there’s volatility in the market, if you’re following your plan, you may find that you could actually harness that volatility. Buy some when the market is low, and when there’s growth, move some of the profit into the more stable parts of your portfolio.

No. 2: Practicing Lifeboat Drills

If the first part of preparation is planning, the second part is practice. At our firm, we like to do what we call “lifeboat drills,” where we try to prepare for the next inevitable downturn. On a cruise ship, you may not be lowering the lifeboat into the water, but don’t you want to have the confidence that if you step foot in that lifeboat during an emergency, it’s not going to sink?

Unlike a nautical emergency, a downturn will happen. We may not know what it will look like, but it’s coming sooner or later. Fortunately, you don’t need to know the when and where. To prosper through any market environment, you generally just need discipline and a plan that you understand.

You might need some financial help to get your portfolio “sea worthy.” It’s easier to stick with your plan when you have faith in it, which is why I strongly believe in using a financial advisor. Yes, I’m biased, but I say this after 27 years of experience in this industry.

Ask anyone at our firm and they’ll tell you: We’ve seen too many people try to do this on their own, and they often end up panicking and bailing on their strategy at the wrong time. Why? They don’t trust themselves. When they see 30% of their equity portfolio vanish, they think, “I messed up. I made the wrong investment decisions, and now I’m ruined!”

If you decide to work with an advisor, find someone who can help you make high-level, tactical decisions about your investment goals based on the context of your personal financial blueprint. Doing this can allow you to gain a clear sense of why your personalized investment model is allocating funds to various asset classes. If you understand what’s happening on your behalf with your investments, you should feel a lot more confident during the tough times.

Even though no one can predict the next market correction perfectly, a financial advisor should be able to separate the news from the noise to understand what is happening in the markets. They should also practice lifeboat drills so they and you are not caught off guard during a downturn. You want an advisor who can show you how your lifeboat works and who knows how to use it.

Safeguard Against Your Emotions

Market corrections are typically uncomfortable. Waiting them out feels like being a kid in class watching the clock and waiting for the school day to end—every second feels like an eternity.

As the market continues to dip downward, you might spend every day wondering, “How low will it go? Will it ever come back up?” With the internet, you might check the market constantly during a downward correction. This isn’t good for mental or emotional health. Being proactive and responsible is good, but it’s never good to spend every minute of the day checking the market, especially when you’re supposed to be enjoying your retirement.

When you find yourself in this state of mind, it’s important to keep your emotions in check. With at least five years of your income needs set aside in fixed income investments, and a plan that you understand and are confident can weather the storm, the more likely you’ll be ready for market volatility.

The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.

Bill Keen: Having a plan to handle volatility is absolutely critical.

About Bill

Bill Keen is a CHARTERED RETIREMENT PLANNING COUNSELOR℠ and independent financial advisor with more than 25 years of industry experience. As the founder and CEO of Keen Wealth Advisors, a registered investment advisory firm, he specializes in providing personalized retirement planning designed to help people thrive before and during their retirement years. With a passion for educating others, Bill regularly blogs about retirement planning, hosts the podcast Keen on Retirement, and has contributed to U.S. News and World Report, Reuters, Wall Street Journal’s Market Watch, Yahoo Finance, and other publications. Based in Overland Park, Kansas, Bill and his team work with clients throughout the greater Kansas City area and across the nation. To learn more, connect with him on LinkedIn or visit www.keenwealthadvisors.com.

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