Market volatility has been all over the headlines. What started with uncertainty around the U.S. presidential elections has escalated as coronavirus spreads. Markets have retreated, and we have officially entered a bear market. It's important for retirees, or soon-to-be retirees, to have a plan and stick with it, especially during a time like this. Your retirement plan is even more important when the markets are being driven by unpredictable and likely short-term events.
Whether you are a few years out or in the early days of retirement, here are five tips for navigating turbulent waters that won’t require you watching stock prices all day long.
1. Understand how much guaranteed income you have
It's rare that all of your retirement savings are linked to the markets. In fact, most retirees have a combination of Social Security, annuity and sometimes pension income that can provide a cushion against market volatility. Luckily, your Social Security and pension are not linked to market movements. In addition, if you have a fixed annuity, it can provide you with predictable returns that are non-market related. These sources of guaranteed income can quickly add up. For example, at Kindur, our customers receive, on average, $2,297 in Social Security benefits each month, providing them a stable foundation to their retirement income.
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How much guaranteed income do you need? We recommend that our customers cover their essential spending (e.g. food, transportation, housing, etc.) with guaranteed sources of income. When markets are volatile, it may be prudent to cut back on luxury or non-essential expenses like travel or going out to dinner. Therefore, you don't have to worry about covering your bases.
2. Check your stock-to-bond ratio
Your stock-to-bond ratio is one way to make sure you are comfortably navigating through market volatility. Particularly in the early years of retirement, it's not uncommon for individuals to de-risk their portfolios modestly as they settle into their new retiree lifestyle. This typically means selling stocks and buying bonds instead. As retirement spending and lifestyle become more tangible and clear, refocusing on the long-term plan can make sense. At Kindur, we take this one step further by factoring your retirement income into your asset allocation recommendation. For example, if you are one of the lucky few with a pension that covers much of your retirement spending, you may be able to take more risk with your savings. If, however, you are depending on your savings to cover essential spending, then a more conservative approach may make more sense.
How can you determine the best stock-to-bond ratio? Typically this is best done with an online planning tool, such as Kindur, or a financial adviser. When deciding your stock-to-bond ratio, you will primarily be evaluating what the long-term returns would be required to meet your retirement goals, but also understand what the volatility, or market ups and downs, might be. This can be both a personal risk tolerance question but also dependent on your other resources -- for example how dependent are you on this portfolio to fund your essential spending in retirement? If it’s critical, then you may want to take a more conservative approach (i.e., more bonds, less stocks).
3. Invest for the long term
Long-term investing isn’t just for millennials. Baby boomers are looking forward to lasting 25+ years in retirement. Thus, giving boomers more time in the market can help them extend the life of their portfolio. The SECURE Act, which passed at the end of 2019, gives retirees who have part-time income additional opportunities to save for retirement. Also, if you are over the age of 50, don’t forget catch-up contributions to your IRA! You can contribute an extra $1,000 a year, up to a total of $7,000. (For more, see How Much Can You Contribute to a Traditional IRA for 2020?) If you didn’t max out your 401(k) or IRA in 2019 already, the recent pullback gives you an opportunity to invest before the 2019 deadline (April 15, 2020). While today’s markets can create buying opportunities, ensure you also have sufficient cash reserves to weather the storm.
4. Minimize Your Fees
In addition to the market’s volatility, are hidden fees draining your retirement savings? While there are many factors to take into account when choosing your investments, it is important to keep an eye on fees. Today’s investors have more high-quality choices at lower costs, but too often fees can be confusing and opaque. We estimate that the average annual cost of an investment adviser is approximately 1.49% per year. Over time, this can equate to losing $77,000 in fees and potential returns on a $250,000 portfolio, compared with a lower cost adviser, which charges 0.50% per annum.*
5. Don't overpay (retirement) taxes
If you have retired and started to withdraw from your retirement savings accounts, keep an eye on the new set of taxes you will face. If you are like many Americans, you have likely saved for retirement across several accounts, which have different tax statuses. For example, Roth IRAs have tax-free distributions, but traditional IRAs are taxed at your income tax rate. (See How 10 Types of Retirement Income Get Taxed.)
We estimate that a retiree with a $1 million nest egg will save over $61,000 by being tax aware when he/she withdraws from these accounts. The order in which you tap different accounts — whether taxable or tax-exempt first — can make a bid difference in your overall financial picture.
It's tempting to keep your eyes on the stock market, especially when volatility increases. However, by focusing on these five tips, you can stay in control of your portfolio by positioning it for the long term and get back to living your retirement.
*Fee estimated details: Compared to the average cost of an investment adviser: The average annual cost of an investment adviser, which Kindur estimates to be approximately 1.49%, is calculated as the sum of the average investment advisory fee plus the average fund fee. Average investment advisory fees are estimated to be 0.95% annually based on RIA in a Box’s Q1 2018 survey of 1,500 registered investment adviser ("RIA") firms. Average fund fees are calculated based on the Investment Company Institute (ICI) 2017 Trends in the Expenses and Fees of Funds which reported the asset weighted average fees for equity funds to be 0.59% and the asset weighted average fees for bond funds to be 0.48%. For a portfolio comprised of 60% stocks and 40% bonds, Kindur estimates that the annual asset weighted average fees for such a portfolio would be approximately 0.54%.
By comparison, Kindur estimates that the average annual cost for its services is approximately 0.56%. This estimate is the sum of Kindur’s 0.5% annual advisory fee plus the weighted average annual ETF fees for a Kindur portfolio invested with a 60% stock and 40% bond asset allocation, which is estimated to be 0.06%. Please note that the particular ETF fees you pay may be higher or lower depending on the particular Kindur portfolio you select.
In order to calculate the amount of additional money that a customer could keep in retirement, Kindur compared the projected account value after 25 years for an account paying the cost of Kindur’s services verses an account paying the average cost of an investment adviser. Kindur assumed a starting account value of $250,000 and an annual lump-sum fixed withdrawal in retirement on the first day of the year of 4% of the starting account value. Kindur further assumed that the customer retires today and that the annual withdrawal amount in retirement grows by 2% each year to account for inflation. Kindur’s calculations assume both accounts are invested in a portfolio comprised of 60% stocks and 40% bonds, which, based on Kindur’s 2019 capital market assumptions, grows at 4.75% per year. Kindur’s projections do not account for any taxes that might be owed, including, but not limited to, taxes due on any investment returns or principal.
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