It’s finally here: the end of the longest bull run in market history. It was only a matter of time until the market corrected, and now that it has, investors are left wondering how low we will go, and what will happen next.
Watching your 401(k) and investments drop is gut-wrenching for anyone, but those who are newly retired face unique risks and added angst. Their savings has become their source of income, and they need to rely on withdrawals from their investments for their retirement income for the rest of their lives.
The biggest risk doesn’t come from the losses experienced today. Investors need to keep in mind that once you start taking that income, especially when starting in a market downturn, you’re much more vulnerable to market volatility due to sequence of returns risk.
From just $107.88 $24.99 for Kiplinger Personal Finance
Be a smarter, better informed investor.
Sign up for Kiplinger’s Free Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
The risk, explained
You may have heard about sequence of returns risk, but what does is actually mean, and what are the impacts on a financial strategy? When a retiree withdraws assets while the market is down, losses on those assets are “locked in,” and the investment value that was removed no longer has the potential to increase if the market rises. Those losses will diminish the total value of remaining assets, so you’re starting with a lower amount than you had originally planned. And if you have the unfortunate luck of retiring amid several bad years, your retirement income is, in turn reducing your overall nest egg. Think of it as reverse dollar cost averaging.
Over a long retirement, this continual chipping away of assets could cause your hard-earned money to run out more quickly than anticipated. And with people living longer than ever before, making sure your money lasts as long as you do it is often a concern among retirees.
With the recent market volatility, which we can only assume will continue, new retirees as well as those getting ready to retire need to face the very real possibility of retiring in a down market. While no one knows what the markets will do tomorrow or 10 years from now, here are a few ideas to help new retirees understand these risks, and help mitigate their effects. The most important thing to remember is it is not too late.
Reassess your withdrawal rate
Many retirees stick with the “4% rule,” and withdraw a set amount from their initial asset value every year. But if you’re in a down market, that fixed amount represents a larger chunk of your total assets over time.
Some retirees’ plans may start with a smaller percentage to make that money last, or instead, take 4% of the current account value each year. It’s important to understand that this means your retirement income may fluctuate from year to year. While it’s not always ideal, as long as you understand annual withdrawals may vary, you can make a plan now to adjust for some non-discretionary cuts in the future. This is a tough strategy that is not very popular as it requires discipline and willingness to “go without” some of the activities that make retirement enjoyable.
Take on less market risk
As you near retirement, traditional wisdom recommends becoming more risk averse. Working with a financial professional, you can determine the right level of risk for your specific situation, and build in a strategy that helps address market risk as you reach retirement age. That way, less of your overall investment is subject to a potentially negative sequence of returns — especially early in retirement when it can cause the most harm.
Explore guaranteed lifetime income
Financial products that provide guaranteed retirement income can also help offset some of the risks that retiring in a down market can pose. Some products, like an annuity, can offer a level of protection against market risk, as well as the opportunity for income increases in retirement. These options may either be built into the contract, or are optional and available for an additional cost.
Protecting yourself from sequence of returns risk
No one knows what the market will do, so one of the smartest things we can do now is to prepare. A financial professional can help you create a retirement income strategy than can help address sequence of returns risks, and also add in some flexibility so you can stay nimble in a volatile market.
While big market drops can be scary, just remember to have faith in the strategy you and your financial professional have developed together, and that the markets have traditionally bounced back — although how high and how long of a bounce can vary greatly. Near and recent retirees are uniquely vulnerable to negative returns, so it’s important to make smart decisions now and to not let emotions get the best of you.
Annuity guarantees are backed by the issuing company.
-
US-China Trade Hopes Send Stocks to New Highs: Stock Market TodayApple and Microsoft are on track to join Nvidia in the $4 trillion market cap club.
-
A Lesson From the School of Rock About the MarketsIt's hard to hold your nerve during a downturn, but next time the markets take a tumble, remember this quick rock 'n' roll tutorial and aim to stay invested.
-
A Lesson From the School of Rock (and a Financial Adviser) as the Markets Go Around and Around
It's hard to hold your nerve during a downturn, but next time the markets take a tumble, remember this quick rock 'n' roll tutorial and aim to stay invested.
-
I'm a Financial Pro: This Is How You Can Guide Your Heirs Through the Great Wealth TransferFocus on creating a clear estate plan, communicating your wishes early to avoid family conflict, leaving an ethical will with your values and wisdom and preparing them practically and emotionally.
-
To Reap the Full Benefits of Tax-Loss Harvesting, Consider This Investment Strategist's StepsTax-loss harvesting can offer more advantages for investors than tax relief. Over the long term, it can potentially help you maintain a robust portfolio and build wealth.
-
Social Security Wisdom From a Financial Adviser Receiving Benefits HimselfYou don't know what you don't know, and with Social Security, that can be a costly problem for retirees — one that can last a lifetime.
-
Take It From a Tax Expert: The True Measure of Your Retirement Readiness Isn't the Size of Your Nest EggA sizable nest egg is a good start, but your plan should include two to five years of basic expenses in conservative, liquid accounts as a buffer against market volatility, inflation and taxes.
-
New Opportunity Zone Rules Triple Tax Benefits for Rural Investments: Here's Your 2027 StrategyNew IRS guidance just reshaped the opportunity zone landscape for 2027. Here's what high-net-worth investors need to know about the enhanced rural benefits.
-
The OBBB Ushers in a New Era of Energy Investing: What You Need to Know About Tax Breaks and MoreThe new tax law has changed the energy investing landscape with expanded incentives and permanent tax benefits for oil and gas production.
-
Ten Ways Family Offices Can Build Resilience in a Volatile WorldFamily offices are shifting their global investment priorities and goals in the face of uncertainty, volatile markets and the influence of younger generations.
