It seems as though the phrase “unprecedented volatility” has been used a lot in recent years to describe the behavior of the stock market. But few periods have seen the kind of stomach-churning swings like those of the recent days since President Donald Trump announced – then delayed – the imposition of his sweeping tariff policy.
It’s always dangerous writing about the behavior of the market when everything is so unsettled, because today’s one percent drop becomes tomorrow’s one percent gain. But whether the “trend du jour” is in the red or the green, volatility appears to be here to stay, and that has retirees (and those soon to retire) scrambling for the best money management strategy in highly uncertain times.
List of Recommendations Should Include a Financial Dashboard
With that in mind, let’s explore this recent article from the New York Times in which reporter Diane Harris presents some recommendations for retirees from financial experts. (Please note that online access to the article may require a subscription.)
The basic premise is simple. When we’re still actively working, the usual advice in times of market turmoil has traditionally been to hang in there and wait five or ten years until losses become gains. (After all, that’s more or less what happened after the recession of 2008.) But those in retirement may not have that long to wait – so what’s the answer?
Before we dive into the New York Times piece, there’s one tool this article doesn’t mention, and that’s a financial dashboard. It’s something Rajiv recommends for everyone, especially those looking ahead toward the long term. We hope you’ll contact us so we can explain this concept in greater detail and refer you to the right financial planner who can assist you.
Traditional Advice is to Stay the Course in Volatile Times
Harris begins her article with a recitation of the recommendation the financial markets typically offer when the market acts up: “Stay the course.” “Tune out the noise.” “Focus on the long term.”
She continues, “That’s the advice that experts typically play on repeat at times like these, when stock prices are volatile or fall — as they did Thursday [April 3rd], when the S&P 500 dropped nearly 5 percent, and Friday [April 4th], when it fell 6 percent.” (Editor’s note: on the day we posted this article, the Dow Jones rebounded by more than 7 percent!)
Is this good advice? Harris says, generally yes. “It is wise counsel for most people,” she writes, “since no one knows for sure which way the market or the economy will end up this year, and missing out on stock gains, even briefly, can put a big dent in your retirement savings. What’s more, over periods of 10 to 20 years or more, stocks have always bounced back handily after downturns, leaving investors who remained steadfast with far bigger balances than they had before the turmoil.”
“Perilous Environment” for Current (and Imminent) Retirees
Harris then asks the million-dollar question: what about those who don’t have a decade or more to wait out a recovery?
“For anyone who intends to leave the work force in the next few years or who has recently retired, the current financial environment is perilous,” she says. “If you’re still working, a recession could push you out of a job earlier than planned, cutting short the time you have left to save and extending the period you need those savings to last. And for both near and recent retirees, a big drop in stock prices increases the risk you’ll eventually run out of savings.”
Market Losses in Early Retirement Have a Lasting Impact
For her New York Times article, Harris spoke with Dr. Wade Pfau, a professor at the American College of Financial Services and author of Retirement Planning Guidebook. Pfau told Harris, “What happens to the market and the economy in those near and early retirement years matters disproportionately to the success of your entire retirement plan.”
As Harris goes on to explain, “That’s why financial experts often refer to this period — roughly the five years before or after you stop working — as the retirement danger zone, and urge people in it to be proactive about reducing their risks.”
With that as background, Harris offers five steps planners currently recommend. We’ve had to trim some of the verbiage due to space constraints.
Recommendation #1: Build a Cash Cushion
This is a common recommendation in volatile times. “When stock prices drop just as you start withdrawing funds to cover expenses, you have to sell more shares to meet the same spending needs,” says Harris. “That leaves less money to grow back once the market recovers.”
Harris offers a scenario in which two new retirees start with $1 million in savings. Each withdraws an inflation-adjusted 4 percent a year. Each earns an average of 5 percent annual return over time on their investments. “The only difference,” Harris postulates: “Retiree A has her best year, a 20 percent gain, in Year 1, while Retiree B has his worst year, a 20 percent loss, at the start.”
The upshot is pretty remarkable: after 30 years, Retiree A has $1.6 million more than when she started, while Retiree B runs out of money after about 22 years – crippled by early losses.
Safe Sources of Cash Can Protect Retirement Funds
“To avoid Retiree B’s fate,” Harris writes, “financial advisers suggest moving enough money into stable cash investments such as money market funds and short-term Treasury securities to cover how much you’ll need to pull from savings in the first two to three years of retirement.” This can be done gradually, says Utah-based financial planner Mark Whitaker.
At the same time, says the New York Times article, “It’s also a good idea to identify other sources of income you could tap if needed, such as annuities, a home equity line of credit or even a reverse mortgage if you have substantial equity in your house.”
Whitaker says that having needed funds readily available “helps people disconnect emotionally from what is happening with the market.” It’s good to have cash on hand that’s not dependent on a volatile S&P or Dow performance.
Recommendation #2: Adjust Your Portfolio Mix (a Little)
The second suggestion is also familiar: reexamine your level of risk.
“You can also dampen the risk of losses in your retirement account by shifting more of your assets into bonds,” Harris writes, “which historically have lost far less money than stocks during downturns.” One financial planner Harris interviewed, Clint Haynes from Lee’s Summit, Missouri, said a good long-term goal might be to have five to seven years’ worth of income needs set aside safely in bonds and cash.
But Haynes also urges retirees to keep “a substantial percentage of savings in stocks — perhaps 50 to 70 percent — to combat the other big financial risk for retirees: inflation.” He adds, “Inflation is a low drip, like boiling a frog: The impact kind of creeps up on you, but when it hits, it doesn’t feel good,” Mr. Haynes cautions.
Market Timing is a Highly Unpredictable Exercise
Many people seem to think they can bail out of stocks when things are turbulent, then jump back in when things stabilize. “Don’t fool yourself,” Harris warns.
“Gains historically have come in unpredictable spurts, and the biggest advances often come within days of the worst declines. If you missed the 10 best days over the 20 years from 2005 to 2024, you would have reduced your returns by more than 40 percent.” That’s according to the Guide to Retirement published by J.P. Morgan Asset Management.
One piece of evidence that confirms the unpredictability of the market, according to the report: between 2005 and 2024, seven of the market’s ten best days occurred within two weeks of the ten worst days. Bailing out when things drop can mean missing out when they rebound. (We note that recent market behavior seems to have proved this to be true.)
Recommendation #3: Adjust Your Spending
Most retirees have to pay particular attention to their spending, suggests the New York Times article. You can stretch your cash by cutting spending, even temporarily.
“If you’re still working, every dollar you don’t spend is one you can direct toward saving, to be better prepared if a recession or bear market hits,” says Harris. “And if you’re already retired, every dollar you don’t spend is one dollar fewer you need to pull from savings when stock prices may be down.” Perhaps that big vacation trip or the extra gifts to the grandkids will need to be postponed.
Retirement expert Dr. Wade Pfau also told Harris that retirement funds can be preserved by adjusting annual rates of withdrawal, “limiting withdrawals to, say, 3 percent in bad years for stocks but taking out, perhaps, 5 percent when the market is surging.”
Recommendation #4: Have a Plan B — and a Plan C!
Planning for a worst-case scenario may seem defeatist, but it can actually be therapeutic, we think. Taking definitive action and being creative and flexible in retirement planning are better ways to prepare than dwelling in anxiety and paralysis.
Reporter Harris spoke to Teresa Amabile, a psychologist and professor emerita at the Harvard Business School. She advises facing your worries head-on. “Facing these uncertain markets and an uncertain economy, you can’t help but feel some anxiety, but our research found that exercising agency in making changes and practicing adaptability to unforeseen circumstances can help allay those concerns,” Dr. Amabile said.
Plan for the Ideal Scenario, Plus Two Scaled-Back Alternatives
Harris describes one helpful exercise recommended by Dr. Amabile: “Think through three different options for your lifestyle in retirement — your ideal, a scaled-down version that might be more realistic financially and an even less costly option if economic conditions leave you feeling squeezed.”
None of these options should be overly drastic – no canned beans and cold showers. When you create these scenarios, they should each be appealing: that “best-case scenario” vacation cruise might turn into a close-to-home Air BnB, for example. What’s important is to exercise your power of choice in uncertain economic times. As Dr. Amabile said, “Realizing that you have a variety of enjoyable options is what’s key.”
Recommendation #5: Work a Little Longer
This final suggestion was one we expected to see: “If you’re still working,” says Harris, “putting off your exit date for a while will give you more time to save and shorten the number of years those savings have to last.” This is “a really powerful way to improve your retirement finances,” says Dr. Pfau. Those already retired can seek part-time work to supplement retirement income.
If continuing to work isn’t an option for whatever reason, you may need to consider other lifestyle changes, such as downsizing or cutting expenses more than you planned. As one financial planner told Harris, “The clearer you are about your vision for the life you want in retirement, and the reality of the financial options, the better your chances of getting to a place where it all works out.”
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(originally reported at www.nytimes.com)