The recent market turmoil has had many retirees wondering what they should do. Some people let their emotions get the best of them and make decisions based on fear. Others trade aimlessly hoping they are making the right moves as they try to time the market. Neither of these are good options.
It’s important to have a long-term investment plan that takes market volatility into account so that when (not if) the market dips, you know where you’ll get your income from.
We also need to agree that there isn’t any reliable way to time the market. There are countless brilliant minds and incredibly sophisticated software programs that have tried to figure out exactly when to buy and when to sell. But nobody has been able to come up with a consistent way to time market fluctuations.
If volatility is part of investing and there isn’t any way to time the market, how does an investor feel more comfortable during unsettling market conditions? It’s all about having an individualized income and investment plan, based on your particular needs, and risk tolerance.
At Reed Financial Planning Services, we provide independent, fee-based investment and planning services to affluent clients. We focus on working with affluent clients ages 50 and older to help them plan for their retirement, aging in retirement, and estate planning. The vast majority of our clients are either nearing, or are already in, retirement. Therefore, we need to be very aware of their income needs and the impact market volatility can have on the longevity of their portfolio.
Below is a brief summary of how we plan for market volatility and develop our clients' income plans.
We first need to estimate our clients’ future income needs. Once we have that as a starting point, we discuss their various sources of retirement income. For many, that includes social security, pension, rental income, and sometimes some continued work. Then, we estimate the gap between their income needs and the funds they will receive from non-investment income sources. That provides us with a rough idea of how much they might need year over year.
We then start developing their retirement income plan to account for their monthly or annual income need. We inventory all assets including cash and bank savings. Those are often the first assets that we consider using as there aren’t any tax implications for using bank savings and the long-term growth potential is limited. Next, we look at other invested assets and discuss the tax ramifications of selling any of the funds. That allows us to invest with purpose. The assets that we intend to use first are often invested more conservatively in our shorter term “buckets”. Assets that we don’t anticipate needing for many years to come can remain invested and are earmarked as long-term “buckets”. It’s true that the funds in long-term term investments may fluctuate more in value. However, if their timeframe is such that we likely have time to allow those assets to recover, the shorter-term volatility has little impact on our ability to derive income from the portfolio.
The general allocations (cash/bond/stock) are applied across accounts. We may lean towards or away from certain stock or bond sectors as market conditions warrant, but we aren’t going to take on any large bets with our clients’ money. All investment decisions are made based on our clients' long-term investment plan.
As we begin using our clients more conservative investments, we look to our longer-term assets and aim to take income or harvest gains to replenish our shorter-term buckets. By doing so we always have a good number of years’ worth of income needs out of the stock market, sitting in our short-term buckets. Proper asset allocation and diversification are so important to ensure a client isn’t overly exposed to any specific area of the market. It can also help by having exposure to negatively correlated investments. In other words, to hold investments that could react in opposite directions; when one investment drops, another might rise.
Through proper diversification and by investing with purpose, we know where our income is going to come from even when equity markets are down. This gives our clients the confidence to remain invested during times like these.
If you want professional guidance and meet our investment minimum, we would be happy to help. The first step would be to schedule your introductory phone consultation. You can click on the link below to view our availability and schedule your consultation.
All investing involves risk, including the possible loss of principal. There is no assurance that any investment strategy will be successful. A diversified portfolio does not assure a profit or protect against loss in a declining market. Cetera Advisor Networks LLC exclusively provides investment products and services through its representatives. Although Cetera does not provide tax or legal advice, or supervise tax, accounting or legal services, Cetera representatives may offer these services through their independent outside business. This information is not intended as tax or legal advice. The views stated in this letter are not necessarily the opinion of Cetera Advisor Networks LLC and should not be construed directly or indirectly as an offer to buy or sell any securities mentioned herein. Due to volatility within the markets mentioned, opinions are subject to change without notice. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed. Past performance does not guarantee future results. Investors should consider the investment objectives, risks and charges and expenses of the fund carefully before investing. The prospectus contains this and other information about the funds. Contact the issuing firm to obtain a prospectus which should be read carefully before investing or sending money.