- Find ways to stay focused on your retirement goals
- Maintain your discipline and remember these principles:
- Perspective helps
- Navigating retirement planning through volatility
- Revisit your retirement planning goals
- Stay invested to cover growing costs
- Incorporate Social Security
- Explore strategic Roth conversions
- Your 401(k) and Stock Market Volatility
- DURING MARKET VOLATILITY, DON’T TRY TO IMPROVE THE PERSONAL RATE OF RETURN IN YOUR 401(K)
- IF YOU FOCUS ON PROTECTING YOUR 401(K) INVESTMENTS FROM STOCK MARKET VOLATILITY, YOU’LL LOSE OUT
- HOW DO I LOWER THE VOLATILITY OF MY 401(K)?
- WHAT INVESTORS SHOULD DO ABOUT MARKET VOLATILITY
- 401(K) AND STOCK MARKET VOLATILITY
- Market Volatility in Retirement: What if You Haven’t Prepared?
- Step 1: Know how much you can spend
- Step 2: Look for ways to reduce your spending
- Step 3: Look for other cash solutions
- Step 4: If you must tap your savings, be strategic.
- Bottom line
- Investing near retirement: 4 tips to keep in mind during market volatility
- 1. The news headlines can be unsettling, but don't lose sight of your long-term retirement goals
- 2. Focus on what you can control
- 3. Keep your retirement investment options manageable
- 4. Get help from a financial professional when you need it
- Managing the impact of volatile markets on your retirement savings
- Be aware of your risk tolerance
- Consider diversification to reduce fluctuations
- Consider reducing your pension payments
- Seek support from a professional
Find ways to stay focused on your retirement goals
Thanks to 24-hour financial news channels, the Internet and the mobile devices we all seem to have these days, there is so much more news and information about the markets available to us. While you might expect that it would help us get better investment results, the opposite is true for many investors.
During times of extreme market volatility, it's important to remember that market fluctuations are normal and that staying the course may produce greater returns in the long run. As difficult as it may be, try focusing on what is within your control, saving more. Learn more about how to survive market volatility (PDF) or Watch this video.
Did you know, according to a recent bankrate.com survey, 66% of Americans did not touch their investment accounts, even as market volatility soared?1 Congratulations on staying the course.
It's also important to remember, this isn't the first epidemic or crisis to wreak havoc on the markets. While the below epidemics caused short-term disruptions and extreme market drops, economic growth later resumed.2
|CRISIS/EPIDEMIC||YEAR||RETURN OF IFA S&P 500 INDEX 1 YEAR FOLLOWING|
|1987 Market Crash||November 1987||15.93%|
|Avian (Bird) Flu*||June 2006||20.49%|
|Lehman Bankruptcy||October 2008||-6.60%|
|H1N1 (Swine Flu)*||April 2009||38.78%|
|9/11 Terrorist Attack||September 2001||-20.61%|
|Brexit Vote Passed||June 2016||17.87%|
|2018 Market Correction||December 2018||16.06%|
*The return is the total return starting the month after the stated date of the epidemic.
Maintain your discipline and remember these principles:
- Tune out the noise from the financial news media and if you feel you taking action in response to news events, seek out professional advice.
- Stay focused on your plan. Remember, you are investing for the long term.
- To help lessen the impact of market fluctuations, maintain a diversified portfolio that’s suitable for your retirement goals and risk tolerance.
- Take advantage of opportunities to invest when others react emotion; consider buying when they are selling in falling markets.
We’ll continue to be here for you, no matter what’s to come.
Our commitment to you remains unwavering and we'll continue providing the support and education you need to make decisions that are right for you.
See what Nationwide Retirement Plans' President Eric Stevenson has to say, including:
- How we're here for you and will answer your questions
- Our experience in weathering market volatility
- The importance of staying the course and having an investment plan
As always, you can access your account online, or contact us with questions. We're committed to addressing your concerns. There are several ways you can connect with your account or with us:
Login to your Savings Plus account to make changes to your contributions, update your investment strategy, and more.
Contact the Savings Plus Solutions Center at (855) 616-4776 from 5 a.m. – 8 p.m. PT, Monday-Friday.
Reach out to the licensed Retirement Specialist in your area to set up an appointment.
1 Survey: Majority of Americans have cut their spending because of coronavirus concerns. http://www.bankrate.com/surveys/spending-investing-during-coronavirus/#investments. 3/31/2020
2 Market Timing: More Evidence Why It Doesn't Work – https://www.ifa.com/articles/market-timing_more_evidence_really_doesnt_work/
Savings Plus is the 401(k) or 457(b) plan available to most State of California employees, including employees of the Legislature, Judicial, and California State University (CSU) system.
Retirement Specialists provide information for educational purposes only. This information is not meant to be used as investment advice. Retirement Specialists are Registered Representatives of Nationwide Investment Services Corporation, member FINRA, Columbus, Ohio.
Navigating retirement planning through volatility
Navigating retirement planning in normal times—without high levels of unemployment, volatile markets, and an election around the corner—is hard. But 2020 has made that task even more complex and, at times, confusing.
That is why now may be a good time to revisit your retirement strategy the lessons we’ve learned this year.
Revisit your retirement planning goals
Pandemic economy or not, it’s a good idea to revisit your retirement strategy every-so-often—annually is recommended. But checking in doesn’t necessarily mean making drastic changes.
The first question to ask yourself is: Has the pandemic resulted in you needing to rethink your goals? Are you aiming to retire early, spend differently or just have different priorities as a result of this years’ experience? Ensure that you are factoring that in your goal.
If you experienced income interruptions or had to take on significant expenses in the past months, there are ways to help bridge that gap.
Tally up the numbers: you might need to tweak your budget, consider such options as planning to retire later, downsizing your home, or reducing the amount you’re putting towards your child’s education.
There are many options to explore and when it comes to making adjustments, keep in mind that extremes aren’t always the answer. Consider connecting with a financial advisor to better navigate those options.
While you’re at it, make sure that your current estate plan is up-to-date and reflects your wishes. This may include reviewing your beneficiaries and checking on important estate planning documents, such as wills, trusts, and healthcare proxies.
Stay invested to cover growing costs
Understandably, many cautious investors held on to more cash than usual to avoid the drastic market swings in the spring.
But now that the dust has settled, some of those investors continue holding cash or money market funds 1 In addition, this year has shown many of us that we probably could be spending less, so if you haven’t had an income disruption, you may have some excess cash.
Holding on to that cash in the current low-rate environment, may not be the best approach, and can actually hurt your chances of not only meeting your goals, but outpacing inflation alone.
Waiting for the perfect moment to get invested—trying to time the market—is ly to cost you in missed earnings. This is partly because the worst days of the market are typically very close to its best days.
For instance, between 2000 and 2019, six of the best 10 days for the S&P 500 occurred within two weeks of its worst days 2 . And to illustrate the potential impact: $10,000 fully invested in S&P 500 in that period would result in a $32,421 total return.
If the same $10,000 investment missed just the 10 best days in those 10 years, the total return would be $16,180—about half.
And once you add the growing costs of healthcare and the need for long-term care, staying invested becomes even more critical.
Average annual Medicare costs experienced by today’s 65-year-olds is expected to triple over the next 30 years, due to higher than average inflation for healthcare expenses, increased use of healthcare at older ages, and increasing supplemental coverage premiums 3 .
So when planning for retirement, it’s prudent to assume a 6% annual increase in healthcare costs, and make sure your strategy accounts for that inflation. And these costs typically don’t include most long-term care expenses.
At age 65, about 1 in 10 men and nearly 2 in 10 women may end up needing significant care for 5 years or more 4 .
Take some time with a financial advisor to see if your current strategy accounts for these growing costs.
Incorporate Social Security
While you may not need any major changes to meet your goals, there may be some opportunities to maximize your retirement strategy.
And a good place to start could be Social Security. Social Security can be a significant part of your retirement income, replacing about 40% of preretirement income for an average worker 5 .
But the timing here is key: if you begin collecting Social Security the minute you are allowed to—which is currently age 62—your benefits may be lower than if you wait until your full retirement age or age 70.
On the flip side, if collecting sooner allows you to remain more disciplined in your investment strategy, claiming early may be something to carefully consider. You should discuss with your financial advisor the various scenarios and understand the benefits and tradeoffs before making a decision.
Of course, when including Social Security in your strategy, it’s important to consider the health of and the potential changes to the system.
According to the 2020 Social Security Board of Trustees report, while the trust fund is ly to be depleted by 2035, current payroll taxes are projected to fund 75% of Social Security benefits through 2091. Therefore, even younger workers are ly to receive some of the benefits.
Today, there are a number of proposals being discussed, including increasing payroll taxes and increasing the overall retirement age, to help ensure that Social Security is fully funded in the long-run.
If you are in or nearing retirement, these changes are unly to affect you. For younger workers, it’s important to keep an eye out for any potential changes and begin planning as soon as possible.
Explore strategic Roth conversions
Another opportunity to consider for refining your strategy is traditional-to-Roth IRA conversions. While both accounts are used for retirement savings, if you hold a Roth IRA you are not required to take out regular distributions in the future. Plus, withdrawals that meet certain requirements are free of federal income tax. Here are a few considerations before you convert:
- Keep in mind, depending on the size of your account and your tax bracket, you may need to pay a large tax bill the year you convert to a Roth.
- Completing periodic conversions—instead of in-full—could help you control the tax impact and is typically a recommended approach.
- If you expect your tax bracket to increase going forward—resulting in a potentially larger tax bill if you convert or withdraw in the future—then switching now may save you money. Here too, it may pay to consult a financial or tax advisor. Here’s a deeper dive on considerations for traditional-to-Roth IRA conversions.
Carefully considering your tax brackets when making Roth conversion decisions is key. For one, Roths can help you transfer the most value to your beneficiaries.
If there is a large traditional IRA transferring to a few beneficiaries who are in their peak earnings years and will be taking distributions (either voluntarily or as required minimum distributions), this can erode the amount of wealth transferred.
Conversely, a Roth can be tax-free to beneficiaries (after the five-year Roth holding period has been met). Systematically converting over time at relatively low tax brackets, when compared to your heirs, may mean more wealth transfer to your beneficiaries.
The new RMD age of 72 may give you more years to convert potentially larger amounts– so don’t wait for the RMD and the tax surprise, work with your tax or financial advisor to smooth taxes through retirement.
Your 401(k) and Stock Market Volatility
Don’t put your retirement savings in harm’s way. During a volatile market, what you do and don’t do with your 401(k) can have the biggest impact on your long-term savings goals. The most harmful mistakes to retirement savings are often made during times of heavy market volatility. In fact, bad decision making can be more dangerous than the volatile market. But why?
There can be several reasons why short-term market volatility creates such a danger zone. 401(k) investors may try to enhance their performance by timing the market or, they may focus on protecting what they’ve already accumulated.
DURING MARKET VOLATILITY, DON’T TRY TO IMPROVE THE PERSONAL RATE OF RETURN IN YOUR 401(K)
Who doesn’t want to see their 401(k) grow? A sudden drop in the market can either bring the cold fear of potential loss, or stoke the greed of potential gain, when an investor is looking at their 401(k) savings.
But, when they try to “time the market”—which means buying and selling investments today’s market trends—investors are ly to lose, and lose big.
In fact, there is no financial professional that I am aware of with a long-term track record of being able to consistently jump in and short-term market volatility successfully. And it’s even worse for individual investors.
Market research firm DALBAR’s annual “Quantitative Analysis of Investor Behavior” study shows that, over time, investors typically make the wrong decision with their buying and selling of mutual funds.
Over a 25-year period that covered stocks' activity from 1993 to 2018, DALBAR found that the average stock investor had an annualized return of 6.8%, versus the S&P 500's 9.1% return during that period.
Similarly, bond investors earned an average annualized return of 1.5%, whereas the Barclays US Aggregate Treasury Index returned 4.8%.
Why did individual investors make far less money than the market returned? The answer is they made too frequent of changes and didn’t hold their investments long enough to participate in the long-term benefits.
At different points in a given market cycle, investors missed gains because they wanted to avoid losses, or they took on too much risk because they were too optimistic.
In other words, they tried to “time the market,” and ended up with less than they would have if they had simply left their money alone.
Keep in mind, your 401(k) plan is a long-term investment. Per the DALBAR study, people tend to only hold their stocks for an average of four years, when 401(k) stock investments are mostly designed to be held for decades.
And that’s when you’ll really start to see consistent 401(k) returns, over 10- to 30-year horizons. In fact, if you look at the S&P over any 30-year period, the worst 30-year period (during the Great Depression) still had positive stock returns over 7%.
* Your long term retirement readiness comes down to the time you have in the market, not timing the market.
IF YOU FOCUS ON PROTECTING YOUR 401(K) INVESTMENTS FROM STOCK MARKET VOLATILITY, YOU’LL LOSE OUT
A lot of individuals go into a defensive posture when they think about losing money. And it makes sense. Our brains are wired to fear loss a lot more than we appreciate gains. In fact, it’s called Myopic Loss Aversion, and Nathan Fisher wrote about it specifically when it comes to choosing funds for a 401(k) fund lineup.
Myopic Loss Aversion impacts individual investors this: We feel losses 2.5 times more than we enjoy the same sized gains.*** Essentially, we take gains for granted and worry deeply about losses.
This is where the media comes in by leveraging fear to drive ratings. And unfortunately, it’s easy to be scared—especially with headlines constantly talking about a global pandemic and the economic uncertainty it's causing.
So, people decide to stop investing in their 401(k), or they sell all their stocks (lock in their losses) in a time when they should be holding. After all, gains or losses are all “on paper” until the investment is sold.
As this article from Fisher Investments points out, selling fear not only makes it harder to reach long-term goals, but also makes it more difficult to get back into the stock market.
Since investor fears typically start to subside as the market goes up, that means anyone who sold at the bottom will now have to buy in for more than they got by selling out.
The fear-based instinct can cause real problems for people down the road. If you miss just 10 of the best days in the market over a 20-year period, you lose out on 984% of your cumulative returns!**
HOW DO I LOWER THE VOLATILITY OF MY 401(K)?
The primary way to lower your 401(k) volatility is through the power of diversification. Diversification is a way to manage risk and it means having an investment strategy that spans many different countries, sectors and investment styles. Also, as appropriate, blending other asset types such as bonds into your portfolio.
Another less often discussed way to lower your 401(k) volatility is to check your balance less often. Daily, weekly or monthly reviews can stoke too many emotions. Reviewing on an annual or semi-annual basis is ly all you need.
As long as nothing has changed with your financial situation and retirement goals this can avoid emotional reactionary decision making. Let time and compounding growth do their thing. The longer period you wait to look, the better your balance will ly look.
You just can’t watch the ticker every day.
Here’s what I tell 401(k) plan participants: you are inherently buying stocks with every paycheck, which is every two weeks for many of us.
You’re buying when the market is up and you’re buying when the market is down.
The important thing for your long-term retirement is to regularly and consistently save as much as you can and invest for as long as you can so you can pay yourself in retirement. Keep the long-term perspective.
WHAT INVESTORS SHOULD DO ABOUT MARKET VOLATILITY
In a volatile market, the best guidance is to make sure you’re not making changes to your investment strategy the news headlines or your emotions. And generally, avoid making any rash decisions.
Changes should largely be when you have a change to your personal financial situation or goals. Even if you’re retiring soon, you won’t be pulling all of your money your 401(k) to use on day one.
You’ll still be investing and earning money on your invested dollars for many years, ly throughout all of retirement. Remember: Historically, stocks always win over the long term.
On any given day, stocks’ upward or downward movement is difficult to predict. From a historical perspective, stocks have been positive on a daily basis 53% of the time—about a 50/50 proposition. But look at stock performance on a monthly basis, and you’ll find that returns have been more positive more than 60% of the time.*
And the longer you wait, the better it gets: Over rolling 10-year periods, monthly returns are positive about 94% of the time on average. And over rolling 20-year and 25-year periods, monthly returns are positive during 100% of any given period.*
401(K) AND STOCK MARKET VOLATILITY
The effect of seeing your personal retirement account, or your company’s 401(k) total assets go up and down over the short term can cause an emotional reaction that alters your otherwise-disciplined decision making.
But you can’t score if you pull your players partway through the game. As firm founder Ken Fisher often says, it’s not the losses that investors should be worried about—it’s missing the next big rebound that brings your account balance back up.
And those big spikes are pretty much impossible to time.
Market Volatility in Retirement: What if You Haven’t Prepared?
A market downturn can pose a challenge to your finances in retirement—chiefly, the risk that you’ll have to sell investments at depressed prices to generate income.
The problem here is twofold: When prices are low, you have to sell more assets to raise a set amount of cash, and tapping your portfolio in a bad market could permanently undermine your ability to participate in any future recoveries.
Ideally, retirees should aim to avoid this kind of crunch.
We recommend keeping at least a year’s worth of living expenses in cash investments—such as checking or savings accounts, money market funds or certificates of deposit (CDs)—with another two to four years’ worth in liquid, conservative investments such as short-term Treasuries and other high-quality bonds.
A four-year cushion should help manage risk in most bear markets (according to research by the Schwab Center for Financial Research, from the 1960s through the 2008 financial crisis, the average peak-to-peak recovery time for a diversified index of stocks in bear markets was about three and a half years1).
However, if you haven’t prepared, all is not lost. Consider the following steps to minimize the impact of a down market on your retirement portfolio:
Step 1: Know how much you can spend
If you haven’t done so already, you should figure out how much you can spend annually from your portfolio while maintaining a high degree of confidence that your money will last throughout a 30-year retirement. One common rule of thumb is for retirees to withdraw 4% of their portfolios in the first year of retirement and then adjust that amount for inflation every year thereafter.
While that’s fine as a general rule, you can get a more precise and dynamic calculation by creating a plan with a professional financial planner or using online tools, such as those available through Schwab Intelligent Income™, a feature of Schwab Intelligent Portfolios®. These can map your withdrawals and spending in various types of markets, using projections called Monte Carlo simulation to estimate the probability of your savings going the distance. Market changes—both up and down—can affect those probabilities.
If the probability of your savings lasting is 80% to 90% or more, that’s good. However, if it drops below 80%, we suggest making small, temporary adjustments to keep your plan on track. For example, if you’re using the 4% strategy, ask yourself if you can skip an inflation adjustment this year, or make other small tweaks. If the lihood is lower than 75%, we suggest being more aggressive.
Step 2: Look for ways to reduce your spending
Start by drawing up a budget. It may help to group your expenses in terms of needs, wants, and wishes. Your needs are the essentials—think food, housing, health care, insurance, and taxes. Wants are the nice-to-haves eating out, a gym membership, or travel. Wishes are the things you’d do if you had unlimited time and money.
Cutting back on wants and wishes is the place to start. For example, can you limit how often you eat out in restaurants, or choose less-expensive ones? Can you postpone buying a new car or taking a vacation trip?
Step 3: Look for other cash solutions
Do you have an emergency or rainy day fund? Do you have any cash sitting around in an old neglected account? This is the time to think about using them. If you’re expecting a tax refund, then you should think about filing right away.
If you’re expecting a tax bill, consider postponing—federal tax filing and payments aren’t due until July 15.
You could also get creative. Do you have things you could consider selling? Also, see if a refund can be issued on any pre-paid annual subscriptions you might have.
These are often harder to spot on a monthly budget.
Do you own an annuity that you purchased as an investment but haven’t “turned on” the income yet? Talk with a financial planner or annuity specialist about whether starting income now would make sense, so you don’t have to start drawing from your investment portfolio.
In short, every dollar you can access today is one you don’t have to pull your investment portfolio by selling more volatile assets.
Step 4: If you must tap your savings, be strategic.
One piece of positive news is that the recently passed $2 trillion federal stimulus bill includes a temporary waiver of required minimum distribution (RMD) rules for tax-deferred accounts such as 401(k)s and IRAs for the 2020 calendar year, so retirees will have more discretion over how or whether they use their retirement savings—at least for this year.
So how should you use that discretion if you must still take some withdrawals?
1. Start with interest and dividends from your taxable accounts. Leaving the original investment untouched means it can continue to grow and potentially yield more dividends and/or interest in the future.
Interest is taxed as ordinary income—unless it’s from a tax-free municipal bond or municipal bond fund.
Dividends, on the other hand, are often taxed at the lower capital gains rate of 0%, 15%, or 20%, depending on income level—provided certain requirements, such as minimum holding periods, are met.
2. Tap the principal from maturing bonds or CDs.
The principal from a maturing bond or CD in your taxable account is often the next place to turn—particularly if interest rates have declined and you won’t earn as much by reinvesting the proceeds.
Generally speaking, you won’t owe any taxes on your original principal so long as you hold on to a bond or CD until its maturity date; an early sale will trigger capital gains taxes if you earn a profit on the sale.
3. Consider selling lower-volatility investments. Next, consider selling lower-volatility assets, such as short-term Treasuries, that haven’t been as buffeted by the recent market volatility.
4. Rebalance your portfolio.
If asset sales and the recent market turbulence have left your portfolio alignment with your long-term allocation, consider looking for opportunities to raise cash by rebalancing—that is, selling any assets that have risen in value and buying those that have decreased in value, in order to return your allocation to its original target.
Start by determining how much cash you’d to free up, and subtract that from your current portfolio balance. Then use that new balance to determine your target dollar amounts for stocks, bonds, and cash investments, your target allocation percentages. That will tell you how much of each asset to buy or sell to both raise cash and rebalance your holdings.
5. Prune unattractive investments. If you still need cash, focus on shedding assets whose prospects no longer match your goals.
This kind of portfolio maintenance is a good idea in any market, but it can be particularly useful when you’re looking for items to sell.
A rule of thumb is that if you wouldn’t buy more of a particular investment today, then you should consider selling it.
6. Use investment losses to reduce your tax bill.
Do you have any assets in taxable non-retirement accounts that have fallen in value? You can use those losses to offset gains you may have realized in your taxable accounts over the course of the year, which can help reduce your tax liability—a strategy known as tax-loss harvesting. Even if you have no gains to counteract, you can still use your losses to offset up to $3,000 of ordinary income per tax year until all your losses have been accounted for.
7. Make tax-efficient choices. If, after harvesting all your losses, you still need to sell assets from taxable accounts to meet your cash needs, be sure to make tax-efficient choices.
For example, consider selling investments you’ve held for more than a year.
Any gains on stocks, bonds, and mutual funds held for more than one year are taxed at a maximum federal long-term capital gains rate of 20%, whereas investments held for a year or less are taxed at your federal ordinary income tax rate.
It’s impossible to say what the future holds, but anything you can do to lighten your reliance on large withdrawals from retirement savings during a downturn can help preserve your savings over the longer term. Even small reductions to withdrawals can go a long way toward giving your portfolio time to recover and helping your savings last.
1Schwab Center for Financial Research with data provided by Bloomberg. Research identifies periods in which the S&P 500 Index fell 20% or more over at least three months. Time to recovery is the length of time it took the S&P 500 to complete its peak-to-trough decline and then rise to its prior peak. Past performance does not guarantee future results.
Investing near retirement: 4 tips to keep in mind during market volatility
You’re getting closer to retirement after years of saving and investing and planning for the next chapter of your life.
And then the markets start bouncing around. Naturally, you think about your retirement savings. Should I be worried about my investments? Will I need to change my plans? Should I stop saving until things settle down? Do I change what I’m invested in?
That’s how easy it is for emotion to influence your financial decisions.
Countering that emotion isn’t easy, especially when we’re in the middle of a pandemic. But it’s feasible if you have a plan.
Here are a few ways to manage your emotions when it comes to retirement money and market volatility.
1. The news headlines can be unsettling, but don't lose sight of your long-term retirement goals
The news is full of attention-grabbing headlines that change every day—every hour. And when they focus on financial markets, it can be easy for retirement savers to get overwhelmed by stories about volatility.
“Keep thinking further ahead, not just about what happened today or this week,” says Heather Winston, assistant director of financial advice and planning at Principal®. She suggests making clear retirement goals and setting a timeline to reach them.
If housing prices fall suddenly, your first reaction probably isn’t to immediately sell your house and sleep in your car. That’s because you’re focused on your long-term need for a place to live. You can develop the same mentality for your retirement investments.
“It’s normal to worry about investment losses, but don’t forget about the gains you’ve made over the years,” Winston says. “A solid plan can help anchor your emotions and help keep you from making costly snap decisions.”
If housing prices fall suddenly, your first reaction probably isn’t to immediately sell your house and sleep in your car. That’s because you’re focused on your long-term need for a place to live. You can develop the same mentality for your retirement investments.
2. Focus on what you can control
So what can you do? Concentrate on the things you can control to help you take your focus off the short term. For example, you can adjust how much you’re contributing to your retirement and the amount of risk you take.
- Consider boosting your salary deferral contributions each year to your individual retirement account (IRA) or 401(k). Even better, choose to have your deferral automatically increase, if your employer offers that option.
- You may decide on a mix of investments that matches your tolerance for risk. (Take this short quiz (PDF) to double-check your risk tolerance.)
- Connect with a financial professional to occasionally review and rebalance your investment choices, but not so often that you get caught up in every little market flutter.
- Another potential option is a target date fund, an investment strategy that handles the asset allocation and rebalancing for you. Using a predetermined strategy, the professional manager of the fund does the researching, investing, and rebalancing the portfolio’s target date, which may be the date closest to when you want to retire.
Some studies suggest that the emotional pain of a loss is twice as powerful as the feeling of capturing a gain.1 Your brain is trying to help you avoid that pain. When it comes to your retirement investments, this tendency could lead you to accept lower return potential—and lower growth of your money—as you try to avoid further pain by moving to less risky investment options after a loss.
“When markets go down, people look at their investment statements and don’t the numbers,” Winston says. “That’s a normal reaction. But changing your investments because of what you see on a statement at one point in time vs. a longer-term view may not necessarily be rational.”
That’s when having a plan, or a trusted financial professional, can help you stick to your long-term goals.
3. Keep your retirement investment options manageable
When faced with a lot of investment options you could find yourself in the grip of what Winston calls “decision paralysis.” Some people may cope by opting for “safer,” lower-risk investments—but these investments often have lower potential returns as well.
“The safest choice may not always be your best option if you want long-term growth,” Winston says. With any decision about your investments, there are trade-offs. An investment strategy with low-risk investments may mean you need to work longer or spend less in retirement.
Select the mix of investments that’s right for you and adapt your asset allocation plan your short- and long-term needs.
4. Get help from a financial professional when you need it
Volatile markets can make people nervous and uncertain about their decisions. And that’s completely normal. Keeping up with the news is good, but you know your specific situation and how markets affect you. That’s why having a relationship with a financial professional can help.
“Listening to the news for investment advice can be diagnosing yourself using medical articles from the internet—informative, but not always applicable to your situation,” Winston says. “If you want to know how market moves could affect you and your plans for retirement, you may need more personalized attention.”
A financial professional can help you put together a long-term plan. Or just talk you through what’s happening in the news that you don’t understand. “Sometimes people feel better talking things through with a trusted financial professional,” Winston says, “even if the conversation validates what they already know.”
Listening to the news for investment advice can be diagnosing yourself using medical articles from the internet—informative, but not always applicable to your situation.”
Heather Winston, assistant director of financial advice and planning
1 Kahneman, D. and Tversky, A. “Advances in prospect theory: Cumulative representation of uncertainty.” Journal of Risk and Uncertainty. 5(4): pages 297-323. 1992
About Target Date investment options:
Target date portfolios are managed toward a particular target date, or the approximate date the investor is expected to start withdrawing money from the portfolio.
As each target date portfolio approaches its target date, the investment mix becomes more conservative by increasing exposure to generally more conservative investments and reducing exposure to typically more aggressive investments.
Neither the principal nor the underlying assets of target date portfolios are guaranteed at any time, including the target date. Investment risk remains at all times. Asset allocation and diversification do not ensure a profit or protect against a loss.
Be sure to see the relevant prospectus or offering document for full discussion of a target date investment option including determination of when the portfolio achieves its most conservative allocation.
Increasing your contribution does not guarantee you put yourself in a better spot.
Investing involves risk, including possible loss of principal.
Asset allocation and diversification does not ensure a profit or protect against a loss. Equity investment options involve greater risk, including heightened volatility, than fixed-income investment options.
Fixed-income investments are subject to interest rate risk; as interest rates rise their value will decline.
International and global investing involves greater risks such as currency fluctuations, political/social instability and differing accounting standards. These risks are magnified in emerging markets.
There is no guarantee that a target date investment will provide adequate income at or through retirement. Participants may also choose a portfolio with a target date that does not match the intended retirement date. Compare the different portfolios to see how the mix of investments might shift.
Investment advisory products offered through Principal Advised Services, LLC. Principal Advised Services is a member of the Principal Financial Group®, Des Moines, IA 50392.
The subject matter in this communication is educational only and provided with the understanding that Principal® is not rendering legal, accounting, investment advice or tax advice. You should consult with appropriate counsel or other advisors on all matters pertaining to legal, tax, investment or accounting obligations and requirements.
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Managing the impact of volatile markets on your retirement savings
In uncertain times this, it’s critical to remind yourself what your retirement investment strategy was originally set up for.
This means being clear about the type of investments that make up your strategy, and how they are expected to perform over the long term.
It’s also important to think about your strategy from a factual perspective, instead of reacting with emotion — particularly in response to short-term market volatility — as it may prevent you deviating from your goals.
Growing your savings
If your plan has been to grow your retirement savings to keep up with the rising cost of living, you may have opted for investments that offer good growth potential over long periods of time—such as shares or property.
As a result, your portfolio is more ly to be experiencing greater volatility due to the impact of Coronavirus on share markets.
Generating a stable income
Alternatively, you may have chosen to structure your strategy to generate a stable income and therefore opted for a more conservative investment approach. In this case, you’re less ly to be experiencing significant volatility in your portfolio.
Separating growth-focused and stability-focused investments
A popular strategy for retirees is to ‘bucket’ short-term income needs in more stable investments, separate from future income needs which are invested in more growth-focused assets.
That way, in times of market instability, the longer-term, growth-focused investments can be left untouched to give them time to benefit from any market rebound.
Sometimes it can take many years before investments return to previous highs.
Be aware of your risk tolerance
It’s always important to consider how you feel about risk and market volatility.
Risk tolerance depends on how you feel about taking risk and your ability to do so, such as whether you are financially able to wear any falls so you can stick to your long-term strategy to give it time to recover.
By understanding your risk tolerance, you’ll be better able to make decisions about the structure of your investment portfolio in a way that aligns to you personally.
During periods of investment market instability, how much exposure you choose to have invested in different asset classes may change depending on your level of risk tolerance.
Consider diversification to reduce fluctuations
Diversification helps to insulate your portfolio from significant share market movements because it reduces fluctuations in your portfolio.
It follows the concept of not putting all your eggs in one basket by spreading your money across many asset classes, countries, industries and even investment managers.
The advantage of this is that often, when one area of your portfolio is weak and falling, another may be rising. So, if you have money invested across many areas, changes in their values tend to balance each other out.
Consider reducing your pension payments
One way to help reduce the impact of share market volatility on your savings, if you’re accessing it as an income stream, is to adjust your periodic withdrawal amount.
From 1 July 2019 to 30 June 2021, the minimum pension amount has been halved for people of all ages. This means if you’re under 65, you’re only required to receive income payments of 2% rather than 4% of your account balance in a year. For people aged 65-74, it’s now 2.5% as opposed to 5%.
If your pension payments are at least equal to this reduced amount, you can ask your pension provider to reduce or stop any further pension payments for the rest of the financial year.
Seek support from a professional
Working with a financial adviser can help you design a plan to achieve your financial goals. They may also provide you with a better understanding about the risks and rewards of investing and how you can manage risk in your retirement savings.
Important information and disclaimer
This article has been prepared by NULIS Nominees (Australia) Limited ABN 80 008 515 633 AFSL 236465 (NULIS) as trustee of the MLC Super Fund ABN 70 732 426 024. The information in this article is current as at 20 April 2020 and may be subject to change.
The information in this article is general in nature and does not take into account your objectives, financial situation or needs. You should consider obtaining independent advice before making any financial decisions this information. You should not rely on this article to determine your personal tax obligations.
Please consult a registered tax agent for this purpose. An investment with NULIS is not a deposit with, or liability of, and is not guaranteed by NAB or other members of the NAB Group. Opinions constitute our judgement at the time of issue.
In some cases information has been provided to us by third parties and while that information is believed to be accurate and reliable, its accuracy is not guaranteed in any way.
Subject to terms implied by law and which cannot be excluded, neither NULIS nor any member of the NAB Group accept responsibility for any loss or liability incurred by you in respect of any error, omission or misrepresentation in the information in this communication. Past performance is not a reliable indicator of future performance. The value of an investment may rise or fall with the changes in the market.