Financial professionals spend a lot of time talking about volatility, and with good reason. It's every investor's worst enemy. Over time, it can harm your returns.
Mark Twain once wrote: "There are two times in a man's life when he should not speculate: When he can't afford it, and when he can."
I would add a third and fourth time: When he's approaching retirement, and when he's actually retired.
Sign up for Kiplinger’s Free E-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.
Why stock losses are so hard to recover from
That's a hard lesson for many investors to absorb after years of striving for growth. But a major market loss can be devastating for those who are in or near retirement. And just getting back to even after a pullback or correction requires recovering much more than what you lost, because the gain is on a reduced amount.
The more you lose, the more difficult it gets. A 10% loss requires an 11.1% gain. A 30% loss requires a 42.9% gain. And a 50% loss requires a 100% gain.
So, let's say you have a balance of $100,000 in your investment account, and the markets drop about 20%. Your loss is $20,000, and your new balance is $80,000. You’re a little freaked out, but you wait. And sure enough, the markets go back up by 20%.
Unfortunately, that isn't enough to get you back to your original $100,000 balance. Your gain on $80,000 was $16,000, so you’re still down. You would need a gain of 25% to get back to even.
Every investor should understand that losses overshadow gains. But when you have less time to make up those losses, preserving your savings is especially important.
This principle is known as "sequence of returns risk," and it means that individuals who experience significant losses at the beginning of retirement will have vastly different results than those who experience losses many years before or after retirement.
What to do if you're at risk
Of course, no one knows what the markets will do next week or next year, so you can't time your retirement date to avoid misfortune. Instead, you have to plan around it.
One key strategy is to de-risk your portfolio by reducing the percentage of your holdings tied to the markets—at least during those 10 years or so surrounding your retirement date.
Remember, during the distribution phase, the focus is no longer on what you can earn. It's about how much you can keep. Talk to your adviser about moving some of your money to financial vehicles that have no market exposure, such as specially constructed life insurance policies with tax-exempt income, fixed and fixed index annuities with optional lifetime income riders and long-term-care riders and, in some states, life settlements. A life settlement is an investment in the secondary life insurance market, considered to be an alternative investment.
You also may wish to discuss how you might adjust your withdrawal strategy if your portfolio took a hit. The order in which you plan to tap into your retirement accounts could be key as well.
Americans are living longer—and often they're retiring without the guaranteed pensions their parents and grandparents could depend upon. Protecting your savings from the destructive effects of large losses is becoming increasingly crucial.
Market losses that occur right before or as you begin retirement not only diminish years of smart saving, they can increase the chances that you'll run out of the money you'll need either for retirement income or to leave behind as a legacy for your loved ones.
Make sure your asset allocation is appropriate for your age, risk tolerance and how much you truly can afford to lose.
Freelance writer Kim Franke-Folstad contributed to this article.
-
Do You Really Need That Wine Cellar?Home Features Wine cellars are a popular feature in high-end houses. Will installing one in your home increase its value, or would you be better off with a cheaper solution?
-
Think a Repeal of the Estate Tax Wouldn't Affect You? WrongThe wording of any law that repeals or otherwise changes the federal estate tax could have an impact on all of us. Here's what you need to know, courtesy of an estate planning and tax attorney.
-
Think a Repeal of the Estate Tax Wouldn't Affect You? Wrong
The wording of any law that repeals or otherwise changes the federal estate tax could have an impact on all of us. Here's what you need to know, courtesy of an estate planning and tax attorney.
-
In Your 50s? We Need to Talk About Long-Term CareMany people don't like thinking about long-term care, but most people will need it. This financial professional recommends planning for these costs as early as possible to avoid stress later.
-
Social Security Pop Quiz: Are You Among the 89% of Americans Who'd Fail?Shockingly few people have any clue what their Social Security benefits could be. This financial adviser notes it's essential to understand that info and when it might be best to access your benefits.
-
Such Attractive Yields in High-Grade Munis Are Rare and May Not Last LongAccording to this munis expert, the last time munis were this cheap was a brief period in 2023. If you kicked yourself for missing out then, you have a second chance now.
-
Financial Analyst Sees a Bright Present for Municipal Bond InvestorsHigh-tax-bracket investors have an excellent opportunity to secure low-volatility, high-quality returns at yield levels rarely seen in over a decade.
-
I'm an Insurance Pro: How Not to Get Dumped by Your Insurance AgentYour insurance agent or broker might show you the door if you do any of these five things. Being a good customer is about more than paying your bill on time.
-
Two Estate Planning Issues You Should Never OverlookThis estate planning attorney explains why proper asset titling and beneficiary designations make a big difference when it's time to transfer your wealth.
-
The Four D's That Could Force You to Sell Your BusinessBusiness owners (or their heirs) can be rushed into a sale of their company if they haven't planned for a major change in circumstances — or the four D's.
