Volatility, Emotions, and the Transition to Retirement
Written by Nicholas A. Ibello, CFP®, AIF®
Published on Paladin Registry on October 13, 2020
Retirement is arguably one of the largest life transitions you will ever experience, and the changes that accompany this major life achievement can make many, if not all pre-retirees, emotional. From no longer seeing your colleagues on a daily basis, to wondering what you will do to fill up your free time, the list can go on and on. Change is scary, and graduating to this new chapter of your life will bring up a host of financial and personal concerns. One of the most common questions pre-retirees have is simply, “Am I going to be okay?”
The Retirement Shift
Financially, you will transition from decades of earning and systematically saving to drawing down the nest egg you have built throughout your working years. When you’re working, you already know exactly how much you can spend and save each month. Retirement opens up a new challenge: living and enjoying your life while making sure you outlive your assets, outpace inflation, and perhaps leave a legacy for your heirs.
Personally, you may experience some new and conflicting emotions about leaving the workplace. Fear, anxiety, sadness, and even a loss of sense of self are common for retirees once their identity is no longer so closely tethered to their career. Many retirees also struggle with losing the social aspect of the workplace and are tasked with finding new ways to fill this void.
Sequence of Return Risk
Unfortunately, volatility in the markets in or near retirement can exacerbate these already heightened emotions. Imagine spending decades planning and saving for your retirement, only to experience a bear market that significantly devalues your portfolio. Will you have to delay retirement? Adjust your drawdown rate? Will you have enough to retire in this scenario?
This risk, known as sequence of return risk, has always been one of the challenges in determining a reasonable spending or drawdown rate in retirement. Even if the anticipated long-term return rates are favorable, ongoing withdrawals paired with a series of poor returns within the first few years of retirement can forever stunt the recovery and subsequent earning potential of a retirement portfolio.
So one may ask themselves, “how do you hedge against this potentially injurious threat to your retirement?”
Allocation and Goal-Based Asset Management
The first step is to always have your various investment accounts properly allocated based on your time horizon of “use.” That is, the risk you take with your investments should always be aligned with where you are in your journey towards retirement. The closer you are to the date, the more conservative your allocation should be. Younger investors can afford to take more risk as they have time to see their investments recover should they experience a bear market.
Another aspect of the goal-based asset management involves working with your financial professional to allocate your investments based on when they will be used. Of course, taxes can also threaten the longevity of your retirement income, so you’ll want to make sure you are generating income in a tax-efficient manner. As a general rule of thumb, this means drawing from non-qualified accounts first (individual accounts, joint accounts, excess cash), tax-deferred income sources second (401ks, IRAs), and tax-free accounts last (Roth IRAs). You’ll also want to make sure you have 6-months to a year worth of cash available to cover your expenses in periods of accelerated market downturns and/or prolonged periods of negative returns so you do not have to drawdown on an already depreciated asset.
Strategizing in advance with a trusted advisor for when you will need funds from each account will help guide the decision or which allocation best fits your time horizon—saving you in taxes and protecting the longevity of your wealth.
Building a Sustainable Framework
On any given day, hundreds, if not thousands, of external factors can have an impact on market movements—making future returns impossible to predict. The upcoming election, the pandemic, fiscal policy changes, and social discord are just a few of the most influential factors driving the market this year. Whether you are in the accumulation phase or nearing retirement, with so much uncertainty abound and more election-driven volatility on the horizon, it is more important than ever to make sure you are properly diversified and your investments align with your goals.
Let the CERTIFIED FINANCIAL PLANNER™ professionals at Williams Asset Management help you protect against these and other retirement risks in your financial plan. Whether you need comprehensive and holistic financial planning or investment management, we can help! We are fee-based, independent financial advisors located in Columbia, the heart of Howard County, Maryland. Schedule your complimentary consultation today by calling 4107400220!