Volatile Markets Checklist | Retiree Edition
Volatility is usually more stressful for retirees than it is for people who still have earning potential. If retirement is many years away, coping during a down market is primarily a mental exercise. The key objectives are not to sell into weakness, reevaluate your risk tolerance, and make the proper adjustments. But, if you’re retired, a down market is apt to feel more distressing.
Your portfolio is your paycheck, or at least part of it, in retirement. Maintaining your focus during a period of market weakness requires mental fortitude, just like when you were working, but it may also require course correction to help ensure that your portfolio can sustain withdrawals through retirement.
If you are already retired or retirement is close at hand, here is a checklist to make sure your plan is on track.
Reexamine Your Withdrawal Rate
This is a great starting point. Enormous amounts of research related to sustainable withdrawal rates points to the flexibility of the withdrawal rate as greatly improving portfolio longevity over time. That means spending more during strong market cycles and less during weak ones which in turn allows more of the portfolio to stay in place and heal when markets improve. Another adjustment could be to forgo inflation adjustments for withdrawals after the portfolio has incurred a negative return.
Check Short and Intermediate-Term Reserves
We want to make sure that a portfolio is structured sensibly to meet the planned withdrawals. Generally, an investor could find value in organizing their portfolio based on what one might call the 3-bucket system: short term, medium term, and long term. Short term expenses are kept liquid, medium term expenses are allocated into balanced type portfolios, and long-term expenses are often allocated into portfolios with a long time horizon. This balance could potentially allow for flexibility of spending during different market cycles. Each bucket is not better or worse than the other, but merely different and set to accomplish a different goal.
Re-evaluate Your Long-Term Portfolio
Reviewing your long-term holdings allows for rebalancing of the portfolio and its intra-asset class positioning. For example, US stocks, and especially growth type equities, have dramatically outperformed over the past five years. (1) This can lead to underexposure in areas that may perform well over the next ten years, as well as heightening the portfolios overall risk. Rebalancing and reallocating the portfolio allows for optimal asset class and risk exposure.
Of course, each individual client situation is different and will need to be carefully planned out as market conditions change. Our firm is committed to helping our clients achieve their financial goals.