If you’re nearing retirement, market uncertainty can stir up a lot of anxiety. The assets you need to start generating retirement income soon could swing wildly up and down in value, depending on how they’re invested. But even extreme market uncertainty is not unusual, and fortunately, there are ways to deal with it, both mentally and strategically.
- Shift Your Focus From Short-Term Fluctuations to Long-Term Goals
It’s tempting to check your portfolio every time the market wobbles. But reacting to short-term dips can lead to constant anxiety and, possibly, emotionally driven decisions that aren’t really in your best interest long-term. Instead, zoom out. Historically, the markets have trended upward over time despite volatile periods of uncertainty. Stay focused on your retirement timeline and goals.
- Diversify, Diversify, Diversify
Diversification is your best friend in uncertain times. Spreading your investments across different asset classes helps minimize risk. If one sector takes a hit, others may hold steady or even rise. In the stock market, particularly, it’s important to be diversified not only among different sectors but among different companies within those sectors.
Mutual funds are designed to give you an easy way to diversify, but be aware: Many of the advantages provided by mutual funds when you’re younger can become disadvantages once you approach retirement. Fortunately, a financial advisor who specializes in retirement income can provide other options to ensure you are diversified.
- Adjust Risk as You Age
Your risk tolerance should evolve as you get closer to retirement. Early in your career, you have time to recover from market dips. But once you’re within 10 or so years of retiring, you’ve lost the luxury of time and therefore need to start reducing your exposure to market risk.
An advisor who specializes in retirement income can show you how to do this by shifting your investment focus from growth-first to income-first, growth-second. Typically, this means working with the advisor to create a portfolio designed to generate interest and dividend return at a fixed rate while better protecting your principal from volatility.
- Avoid Outdated Withdrawal Plans
Although many financial advisors still advocate using a withdrawal plan to engineer retirement income (such as the one based on the so-called “4% Rule”), periods of market uncertainty can highlight the flaws inherent in withdrawal plans. As you probably know, a withdrawal plan involves taking income via systematic withdrawals from your retirement accounts at a so-called “safe” rate – that is, 4% – every year.
The main flaw is that for the plan to work, you need to be sure the markets will grow enough over time to consistently replace your withdrawal. That doesn’t always happen. Even worse, in those years when the markets are down, you’re forced to sell more shares at a lower price to generate your 4%. This is known as reverse dollar-cost averaging, a dangerous practice that can cannibalize your nest egg over time.
- Use a True Income Strategy Instead of a Plan
An advisor who specializes in retirement income can work with you to build a more reliable income strategy by investing in vehicles designed to generate income through interest and dividends. This approach eliminates the need to use a withdrawal strategy that relies on market growth. It also allows you to continue growing your portfolio with less risk through strategic reinvestment.
Typically, an income-first, growth-second strategy includes a diversified portfolio of actively managed individual bonds and bond-like instruments (such as annuities), and in some cases dividend-generating value stocks. Many of these tools are contractual, meaning that in addition to assuring your income return at a fixed rate, they also assure the return of the face value of your investment if you hold it to maturity, regardless of any value fluctuations over time.
- Keep Emotions in Check
Even with a true retirement income strategy in place, market uncertainty can cause anxiety and tempt investors to make rash decisions based on fear or greed. But emotional investing often leads to bad choices, so it’s important to keep your emotions in check and stay focused on the bigger picture and your long-term goals. If you’re feeling stressed or unsure about your finances, it might help to:
- Talk to your financial advisor
- Revisit and review your retirement goals (is your strategy still aligned with them?)
- Take a break from daily financial news
- Revisit and Rebalance Regularly
Although making changes based on emotion isn’t a good idea, neither is thinking you should never make changes to your financial strategy at all. No plan should be “set it and forget it.” It’s important to review your strategy with your advisor regularly to make sure every component is still in your best interest or determine if there are changes you can make based on your goals or the markets that might improve your situation.
Final Thoughts
Market uncertainty is a given, but there is no reason it should have a major impact on your life or decision-making process when it comes to retirement income planning. By working with the right advisor, you can create a retirement income plan designed to protect your assets and generate reliable retirement income regardless of market conditions. Think of it as preparing for bad weather: You may not know exactly when the storm will hit, but you can always have an umbrella ready!
