The stock market gyrations have everybody talking, and wondering, "What next – how low can it go?" The back and forth, up and down is like being on a tumultuous sea when all you want is to be back safe on the shore.
If retirement is 20-25 years away you can sleep a little better at night, despite the commotion, but for those who are saying goodbye to the 9-5 this year, next or soon thereafter, they may understandably be tossing and turning.
What do you do in this volatile market when retirement is on the not-too-distant horizon?
"Nobody likes to open up their financial statements and see a decline in value from the last time they looked. Just as rising account values fuel dreams of what retirement might be, falling account values can augur in visions of two hour bus rides to buy cat food," says Chris Georgandellis, a chartered financial analyst with Exchange Capital Management.
The best advice for someone retiring soon, "is to not touch the investments and continue to stay in the market," says Vikram Kaul, Chief Investment Officer of NorthStar Portfolio Investments.
Why? Because in a world where the expected mortality rate is lower and people are living longer, savings have to last longer. Living to 95 is not unusual.
"Longevity risk has grown exponentially higher as time goes by and who knows what scientific advance is around the corner which will enhance life spans, so capital markets have to be utilized for ensuring the right rate of return is obtained on your savings as one enters the gold years," he says. Unfortunately this means having to tolerate volatility. "This is something we have to get comfortable with, or we may have to compromise our lifestyles."
In football, the red zone is when a team gets within the opponent’s 20-yard line and is close to scoring. "The same is true for people approaching retirement. The red zone is within five years. At this time, near retirees should have ‘derisked’ their portfolios by trading out of riskier equity securities and into more stable fixed income securities.
If you’re retiring soon, you shouldn’t have any money in the stock market that you’ll need to spend in the next five years. "It hurts to do this while watching the market rise, but especially at the tail end of a long bull run, the last thing you want to do is watch your savings evaporate in a market downturn," says Rebecca Schreiber, co-founder of Pure Financial Education. Ideally, living expenses for the first three years should be in cash, the next two years’ worth in CDs and bonds, and any subsequent amounts in the market.
Similarly, Damian Rothermel, a certified financial planner with Rothermel Financial Services, has investments in buckets. "For example, funds necessary to live on for the next 3-5 years should probably not be in the stock market at all. We need to accept lower returns, but we are making sure we will not go backwards. The funds needed in 5-10 years can take a little more risk, but not too much. Anything 10 years or more can start to look at more growth oriented investments. This allows us to also ride the waves of the market with more confidence on the funds we are not using for at least 10 years," says Rothermel.
Be smart.The worst thing you can do is panic. "You might be tempted into emotionally selling at the bottom of the market, locking in the losses and never allowing the portfolio to recover. Revisit your allocation, ideally a few years before retirement, and make sure you have an appropriate plan in place that will allow your assets to grow, with an acceptable level of volatility," says Anthony Criscuolo, a portfolio manager with Palisades Hudson Financial Group.
During the last bout of market volatility in August, John Sweeney, Executive Vice President of Retirement & Investment Strategies at Fidelity says they saw a significant uptick in customers reaching out to their advisors to discuss their financial plans. "Market disruption can be like a health scare – don’t wait until times of uncertainty to have a financial check-up," Sweeney says.