For several decades as an investor, there was always a silver lining to a market downturn. That’s when investment managers purchased stocks at value prices so you could enjoy higher returns when the market rebounded. But that all changes when you’re close to retirement and once you’re retired.
Just before retirement, a plummeting market can severely reduce a nest egg’s value. There may not be time for markets to fully recover and retirement may need to be postponed. A market downturn just after you retire creates a different crisis. You are no longer investing money to benefit from a rebound. Your nest egg loses value at the same time you’re withdrawing retirement income, compounding the financial consequences. You may need to modify your retirement lifestyle to ensure you don’t outlive your savings.
These potential dangers are why this period has been called the retirement risk zone, which begins about five years or longer before retirement and lasts about five years or longer after the retirement date.
Managing the risk
Not terribly long ago, safeguarding your portfolio before and after retirement could be quite straightforward. Simply decrease your equity allocation as retirement approaches, increase fixed income, and maintain the conservative mix throughout retirement. But in most cases this strategy alone is no longer enough. Today’s low interest rates don’t allow for enough income, and increasing longevity requires more growth to fund a longer retirement.
Fortunately, there are several financial strategies to protect against the risk of a market downturn during these critical years. One solution involves creating a pool of low-risk fixed-income investments designed to provide several years of retirement income. A separate portfolio of higher-yield fixed income and equities provides longer-term income and growth – and is used to replenish the retirement income pool. This solution is built to withstand market dips, always securing annual income while funding a long retirement.
Other solutions begin upon retirement, such as basing annual retirement income on a fixed percentage of portfolio assets, which takes less of your capital when markets are down.
Determining your solution
These solutions and others are all available to you, and often the answer is to use two or more solutions in combination. Arriving at the best method or methods is based on numerous factors, including your retirement income sources, whether you’re supporting a spouse, the size of liquid assets, your risk tolerance and estate plans.
If you’re approaching the retirement risk zone, get in touch with us to explore the solutions that will suit your situation.