Managing Market Volatility Near Retirement

By Mitchell J. Smilowitz, CPA

As we approach retirement age, managing market volatility assumes greater importance. Earlier in our career market volatility is less of an issue because we have plenty of time for investment markets to rebound. During the 93 years between 1926 and 2018, investors lost money in 25 years. Extend the time period to 15 years, and none of the 78 overlapping 15-year periods from 1926 to 2018 resulted in losses. Over time, in other words, equity investors see their wealth increase.

But those approaching – or in – retirement have less time to recoup investment losses or need the money they’ve saved to pay current expenses. This article addresses some of the things those preparing for, or in, retirement can do to reduce the impact of market volatility.

Determine Your Retirement Readiness

If you’re like most people, you’ve been keeping track of your retirement readiness by estimating. The "X Times Salary" method is one of the easiest and most popular. It sets savings goals for each decade up to retirement.

Within 5-10 years of retirement, however, it is important to get more specific. You’ll want to develop a retirement budget that estimates more concretely your anticipated expenses and income.

Where will you be living and what will housing, food, utilities and medical care cost? What do you expect to spend for non-essentials such as travel? Gifts for your children and grandchildren? A new car? Tzedakah? According to a recent MassMutual Retirement Savings Risk study, 80% of pre-retirees thought their cost of living would be lower in retirement, but only 50% of retirees found that to be the case.

What income do you expect from Social Security? How will you take distributions from your retirement savings so your resources last the rest of your life? Do you plan to continue working?

Finally, how will your tax liabilities change when you retire? Your tax bite may be lower, but how much? You’ll pay taxes on the distributions you receive from your retirement plan and, depending on your income, you’ll pay taxes on your Social Security benefits, too. Clergy remain eligible for the parsonage allowance on distributions from a denominational retirement plan such as their JRB account. How can you plan your retirement income to minimize your tax liabilities?

Adjust Your Investment Portfolio

Protecting against market volatility requires a different approach to investing. Your focus is preservation of principal; growth is important, but secondary. In preparing your retirement budget, consider keeping 5-10 years of planned distributions in low-volatility vehicles such as the JRB Stable Value Fund. You can continue taking distributions from your low-volatility investments when equity markets decline, replenishing your low-volatility accounts when the equity markets rebound. This allows you to remain invested in equities without taking money out when the market is down. Given that retirement can last 20 years or more, this strategy means you invest conservatively for the near future while enjoying the potential growth equities offer to meet your long-term retirement needs.

Consider Working Longer

Your budget may show that you need to work a few more years before you retire. Working longer has three benefits. It gives you more time to recover from market volatility. It allows you to continue contributing to your retirement account. And it reduces the number of years that you rely on your retirement savings.

As you near retirement, you’ll want to estimate your retirement expenses and income and to evaluate your investment strategy. Managing market volatility is an important part of the investment review. How can you take advantage of the long-term returns stocks potentially offer without putting the money you need to pay current expenses at risk? Careful planning, the simple strategies discussed in this article – and the JRB – can help. Call 888-JRB-FREE (572-3733) or email us to set up a time to discuss your retirement budget.