Volatile markets make most investors nervous, and a big downturn can be especially disturbing to those who are approaching retirement or newly retired. Watching the value of your portfolio decline when you may need your assets in the near term is unsettling. But it's important to stay calm and maintain perspective.
Prepare for a Long Retirement
During your working career, you may look at retirement as the end of the investment process, but your investments need to pursue growth throughout retirement, which could last 20 to 30 years or more. So even if the market is at rock bottom on the day you retire, your investments have many years to grow as the market recovers.
You may shift your investments to a more conservative allocation, but you cannot be too conservative if you want to keep up with inflation. The appropriate allocation depends on your personal situation, but the equity portion of your portfolio can pursue growth throughout your retirement while bonds or similar investments provide income. In both cases, time is on your side.
Keep Investing
Although a down market may be discouraging, it's generally not the time to stop your investing program, and it could be an opportunity to build your portfolio at discount prices. If you are contributing regularly to a workplace plan, IRA, or other account, you are practicing dollar-cost averaging, which may help even out the effects of volatility and enable you to buy more shares when prices are down — putting your portfolio in a stronger position to grow when the market recovers. Reinvesting any dividends, capital gains, and interest income may also add shares to your portfolio at a lower cost.
If you are uncomfortable assuming additional risk in a volatile market, you might put money into a savings account, certificate of deposit, or other cash alternative.
Be Smart About Selling
The greatest challenge of retiring in a down market is that you may have to sell some of your investments at significantly reduced values, possibly at a loss. If you have been investing for many years, your investments may show substantial gains, which should be some comfort, but it's still difficult to sell them for less than their value when the market was up.
Stock market losses remain on paper until you sell. If you don't need money from your investments in the near term, you may want to wait for the market to recover before withdrawing funds. The SECURE Act changed the required minimum distribution (RMD) starting age from 70½ to 72 for traditional IRAs and workplace retirement plans, and the CARES Act waived RMDs for the 2020 calendar year. You generally can avoid taking RMDs from a workplace plan as long as you are still working for the company sponsoring the plan. Original Roth IRA owners are not subject to RMDs.
If you do need money from your savings and investments, it might be better to spend down cash first and then access funds from fixed-income investments, giving equities more time to recover. Deciding what and when to sell can be difficult, and you may benefit from professional advice. Although there is no assurance that working with a financial professional will improve investment results, a professional can evaluate your objectives and available resources and help you consider appropriate long-term financial strategies.
All investments are subject to market fluctuation, risk, and loss of principal. When sold, investments may be worth more or less than their original cost. Asset allocation is a method used to help manage investment risk; it does not guarantee a profit or protect against investment loss. Dollar-cost averaging also does not ensure a profit or prevent a loss; such plans involve continuous investments in securities regardless of fluctuating prices. You should consider your financial ability to continue making purchases during periods of low and high price levels.
The FDIC insures CDs and bank savings accounts, which generally provide a fixed rate of return, up to $250,000 per depositor, per insured institution. The principal value of cash alternatives may be subject to market fluctuations, liquidity issues, and credit risk. It is possible to lose money with this type of investment.
Bulls and BearsA bear market is generally defined as a loss of 20% or more from a recent high, while a bull market is a gain of 20% or more from the bear market low. Bull markets typically last longer than bear markets, and the gains during a bull market tend to be significantly higher than the losses during a bear market.
Source: Yahoo! Finance, 2020, for the period 5/26/1970 to 3/31/2020. The S&P 500 is an unmanaged group of securities that is considered to be representative of the U.S. stock market in general. The performance of an unmanaged index is not indicative of the performance of any specific investment. Individuals cannot invest directly in an index. Past performance is not a guarantee of future results. Actual results will vary.