Volatility is typically coupled with opportunity. This is a valuable trend to understand if you are in the wealth accumulation phase. However, investors who are in or approaching retirement often have different priorities.
How do you safeguard a lifetime of savings and investments during market volatility and the highest inflation rates in a generation? Naturally, we recommend partnering with an experienced, fiduciary CERTIFIED FINANCIAL PLANNER™ in the D.C. area who understands the specifics of your unique situation.
Avoid Sudden, Impulsive Moves
Volatility is usually stressful for investors, but being close to retirement can increase it. If you’ve already adjusted your portfolios to more conservative investments designed for your retirement phase, be deliberate with any changes to your plan. Is your financial discipline impacting your success?
It can be tempting for some investors to move to a cash position or withdraw extra funds. Remember, selling any assets outside of a tax-advantaged retirement account or increasing your withdrawal rate can incur taxes. Plus, you eliminate those funds from the benefit of any subsequent recovery.
If you are close to retirement and haven’t already adjusted your strategy, now is a good time. You want to adapt from growth and accumulation to a retirement income planning strategy. Find out more in our complimentary eBook on ten steps to a sustainable retirement income plan.
New Contributions May Grow
With a well-designed investment strategy, new contributions can grow as the market starts to recover. Down the road, it may look like this was an opportunity to buy equities at a discounted rate.
For example, 2008 was a grim year for investors. Between 2007 and 2009, the S&P 500 fell by close to 50%.
However, those who stuck with their plan through 2013 saw the S&P 500 exceed its 2007 high. Investors who held on longer reaped additional benefits. The steep 2008 decline was followed by a 250% climb between 2009 and 2019.
Past performance is never a guarantee of future results, and retirees may not have the luxury of time to wait for a market recovery. That said, for the portion of your portfolio allocated to long-term investments or new contributions, it’s a valuable perspective to keep in mind.
Historically, market rebounds are condensed into a few unpredictable and distinct spurts. You are more likely to benefit if you stay invested than if you try to jump back in when conditions improve.
Roth IRAs do not have minimum distribution requirements, and you do not pay income tax on funds used during retirement. If you have assets in a traditional IRA or a 401(k), a down market poses an opportunity to convert them to a Roth IRA.
When you roll your pre-tax account into a post-tax account like a Roth IRA, you pay taxes on the amount transferred. Depending on your individual circumstances, you could reduce your long-term tax liability by converting a portion of your assets.
Roth IRAs are also good accounts for legacy funds. If you bequeath a Roth IRA to your heirs, they have ten years to withdraw the funds tax-free.
For non-retirement portfolios, you may be in a position to benefit from tax-loss harvesting strategies. When you sell an investment at a loss and replace it with other securities, you can reduce the taxes you owe on your overall investment gains or taxable income.
There are IRS rules that govern these sales. You cannot sell one set of securities at a loss and then turn around and buy more of them, or even something similar, the next day. There has to be at least a 30-day window between the sale-at-a-loss and the purchase of similar stocks.
Work with your financial advisor in the D.C. area to avoid penalties and get the most from these tax-saving strategies.
Review: Risk Tolerance and Risk Capacity
Risk tolerance measures your emotional reactivity to market swings. Risk capacity is your financial ability to withstand loss. If you’re having any anxiety about your retirement portfolio, it’s an excellent time to reassess both.
The best time is when you are calm and clear-headed. Set up a time to meet with your financial advisor in the D.C. area if you have one, and find answers to the following questions:
- Do I have the cash I need to handle short-term goals?
- Where is the money I cannot afford to lose invested, and can that position be improved?
- Are there stable assets I’m not taking advantage of that would be beneficial?
- For retirees, is my next few years of income in stable and accessible accounts, funds, and investments?
Now is an excellent time to understand the goal of each asset class in your portfolio. Does the mix match your target allocations?
Rebalancing is selling assets that outpaced the rest of your portfolio. You then reinvest the proceeds to restore your target asset allocations. Some 401(k) accounts include a feature that rebalances the funds for you.
Diversification takes on new significance in a volatile economy. Are you happy with your asset choices in this economy?
As economies change, so do investment returns. Inflation and volatility create opportunities in different market sectors than other economic conditions. It’s worth looking to see if you are appropriately positioned for the current marketplace.
Volatility is Nothing to Fear
We all love a booming, growing market. It’s terrific when every investment you touch delivers strong returns. Fortunately, challenging conditions present opportunities.
This volatile market may motivate you to tighten your portfolio and align your strategy with your current life stage and goals. Doing so may position you for more significant gains in the long run.
However, if you are uncertain about how to safeguard your retirement savings in the current marketplace and would like individualized advice from experienced advisors, our team is happy to help.
Disclaimer: This article is intended for informational purposes only, and not to be a client-specific suitability analysis or recommendation, an offer to participate in any investment, or a recommendation to buy, hold or sell securities. Do not use this report as the sole basis for investment decisions. Do not select an asset class or investment product based on performance alone. Consider all relevant information, including your existing portfolio, investment objectives, risk tolerance, liquidity needs, and investment time horizon. This report is for general informational purposes only and is not intended to predict or guarantee the future performance of any individual security, market sector, or the markets generally.
The information provided in this article represents the opinions of Brown Miller Wealth Management (“BMWM”) and is expressed as of the date hereof and is subject to change. BMWM assumes no obligation to update or otherwise revise our opinions or this article. The observations and views expressed herein may be changed by BMWM at any time without notice. The information may be based on third-party information, which is deemed reliable, but its accuracy and completeness cannot be guaranteed.
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