Investing After Retirement: Dealing With Volatility


Retirement planning can bring many changes and challenges. After you retire, you’re generally not earning the same income as in your working years—yet you still need enough cash flow to fund living expenses. To meet your retirement needs, you may have different sources of income such as: a retirement account like a traditional IRA, annuity payouts, a pension, Social Security benefits, or other investment accounts containing stocks or bonds.


Some retirees may even continue working to some extent after retirement. But ultimately, if you need growth in your investment portfolio to provide cash flow, keep pace with inflation or meet other needs, you’ll likely need to invest some of your assets in the stock market—which means you’ll be subject to certain investment risks and need to be able to endure market volatility.

Market Volatility Is Normal


Unfortunately, stocks’ long-term price gains don’t occur in a straight line. The stock market goes through ups and downs along the way—such as pullbacks or corrections (sharp, largely sentiment-driven market drops of about 10 – 20%). Short-term market volatility is part of the “wall of worry” that often propels bull markets—periods during which stock prices generally rise. The “wall of worry” is what we call the collection of fears or negative events that occur during a bull market. As bull markets continue to rise past those fears, they climb the “wall”. These worries, fears and the resulting volatility can be uncomfortable to experience—no one likes seeing their portfolio decline in value! But longer-term, history shows short-term volatility is the price investors pay for stocks’ superior long-term returns.


While there may be appropriate times to pull out of equities, leaving the market in reaction to a correction or volatility is likely not the best way to meet your long-term investment needs. It may feel risky to remain invested with your retirement savings, but investors who stay disciplined through corrections or other periods of market volatility are often rewarded with future bull market returns.

Coping with Volatility During Retirement


Having the discipline to stick with your investment strategy after retirement can be difficult, especially during times of market volatility. What can retirees do to stay disciplined? To start, we believe it can be helpful to be aware of some common biases that could affect the way you invest.

  • Myopic Loss Aversion

  • Recency Bias

Humans hate losses more than we love gains. Myopic loss aversion (also known as prospect theory) states we are likely to feel the pain of loss more than twice as much as we appreciate an equivalent gain*. Said differently, many retirees would be proportionally more distraught if their retirement savings went down 20% compared to the satisfaction of a similar gain.


This emotional trait can make investing more difficult and potentially attract investors to investments perceived as safer, such as annuities, fixed-income investments or certificates of deposit. An investor who has previously experienced a significant loss, such as one encountered during a correction or a bear market, may become especially fearful of investing—particularly if it occurs after retirement.


*Source: Kahneman, Daniel, and Amos Tversky. "Prospect Theory: An Analysis of Decision under Risk." Econometrica 47, no. 2 (1979): 263-91. doi:10.2307/1914185.

If stocks have been on an upward or downward trend lately, some investors may be inclined to think that specific trend will continue. This is referred to as recency bias. An investor who experiences losses due to negative volatility may think markets will continue that volatile or negative trend. However, past performance does not indicate future performance. Stocks or other investments may not move in a straight line, and trends may continue or change at any time. We believe it is unwise to base a retirement plan on the market’s recent behavior.


When short-term volatility hits, you have a choice—stay disciplined to your strategy or make changes. While you may feel you need to act as you watch your portfolio value decline, it may not be optimal for your long-term financial goals. For example, say the stock market becomes volatile and your portfolio value drops. You might react by moving into cash or reallocating your assets into a high interest rate savings account or an annuity you consider safer. If you pursue this strategy and miss being invested during stocks’ recovery, your portfolio’s growth likely suffers.



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How Can You Overcome Some of These Investing Mistakes After Retiring?

In addition to being aware of common behavioral errors so you can watch out for them, maintaining focus on the following concepts can help ensure your portfolio is aligned with your financial goals during retirement. 

Focus on Your Long-Term Retirement Goals and Needs


Your investment portfolio should have an asset allocation (mix of stocks, bonds, cash, or other securities) appropriate to reach your goals. Changing that asset allocation in the face of volatility can be risky to your retirement savings. If you don’t allocate your portfolio for the appropriate amount of growth you need, your portfolio could also fail to meet future withdrawal needs. And importantly, don’t forget to consider the impact of inflation on withdrawals—if inflation rises, you could require more money in the future to meet the same needs.


Appropriate Level of Growth


If your goals require investment growth, you should consider investing in stocks—which also means you’ll likely need to endure higher short-term volatility. But despite the short-term volatility, the S&P 500’s long-term average annualized return is about 10%—which includes all corrections and bears*.You can take advantage of stocks’ long-term returns without avoiding volatility.


Evaluate Your Retirement Cash-Flow Needs


You will likely need to make withdrawals for living expenses from your investment portfolio as a source of retirement income, even during downturns. But if you need a larger withdrawal, consider the impact. If your portfolio is down 15% and you withdraw 10% from your portfolio after the drop, you would need a 31% gain just to get back to the initial value. Don’t overlook how withdrawals during volatility could set your portfolio back. During market declines, you might consider limiting withdrawals or relying on other sources of income—such as an emergency fund—in order to minimize the impact to your portfolio.


*Source: Global Financial Data, FactSet as of 2/18/2022



Meeting Your Retirement Goals


Volatility can be difficult to stomach—particularly when you are relying on your portfolio for retirement income. And while maintaining a rational or emotionless strategy can be challenging, if you react to volatility and sell out of the market to try and avoid further losses, you may hurt your chances of having enough income in retirement if you need equity-like growth to meet withdrawal needs. As a retiree, it is important to be disciplined and stick to your long-term strategy—it could increase your retirement portfolio’s long-term prospect of survival.


If you need help controlling emotional responses and sticking to your strategy, you might consider working with a trusted financial professional. Someone who puts your interests first and provides you the education, support and advice you need can go a long way when it comes to helping with your retirement planning. To find out more about how Fisher Investments could help you, give us a call or download one of our educational guides.

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