Enduring Volatility for Comfortable Retirement Income

Key Takeaways

  • To retire comfortably, you should have the discipline to stick with your long-term goals and retirement objectives.
  • Behavioral errors may lead you to make hasty financial decisions that could reduce your savings and keep you from retiring comfortably.
  • Determine what your retirement expenses may be and how much growth your retirement portfolio would need to retire comfortably.

How much money do you need to retire comfortably? As you approach retirement, you’ll wonder if you’ve saved enough to generate a comfortable retirement income stream. You’ll begin to take stock of retirement savings, including employer-sponsored retirement plans, individual retirement accounts (Traditional or Roth IRA.) You’ll also have to consider retirement income sources such as Social Security and any pensions you may have. If the markets have been doing well, you may be less likely to worry about having enough money for retirement.

When volatility causes your portfolio to drop, though, it’s easy to panic. What you thought was a comfortable retirement income stream could be significantly reduced. You may feel like you’ll have to live below your means in retirement.

The sting of volatility loss can elicit some powerful emotions that could lead your retirement plan astray. In this article, we’ll show you how a long-term investing strategy can help you keep perspective and help you avoid harmful investing decisions.

Determine Your Retirement Goals

To maintain discipline during market volatility, you should create investing goals that account for your investment time horizon. Your investment time horizon is the amount of time you need your life’s savings to provide for you. To determine an appropriate time horizon, consider your life expectancy, your spouse’s life expectancy or—if your investments aren’t tied to providing for you and your family through retirement—how long it will take your money to achieve your goals. Keep in mind, due to rising life expectancies, you should plan to live longer than you think.

Keeping Volatility in Perspective

Your retirement goals are like an emotional anchor—when the market experiences downward swings, goals can help prevent you from making hasty investing choices.

Markets rarely move in a straight line. There are ups and downs of various magnitudes that can occur due to investor fears or no reason at all.

The important thing to remember is that, discomfort from short-term volatility is the emotional price you pay for the potential for long-term positive returns provided historically through stocks.

Consider the 2018 report by DALBAR, Inc. This study found equity fund investors held their mutual funds only four years on average, and as a result, these investors lagged the markets.* The average equity fund investor saw a 7.9% return in the 25 years ending 12/31/2017. US stocks returned 9.7%.** The figure below shows the hypothetical value of $1 million invested at the beginning of this period.*

Exhibit 1: Hypothetical Growth of $1 Million Dollars Invested 25 Years, 12/31/1992 – 12/31/2017, Based on Annualized Returns Referenced Previously

Source: “Quantitative Analysis of Investor Behavior, 2018,” DALBAR, Inc. www.dalbar.com. US stocks and bonds are represented by the S&P 500 Index and Barclays Aggregate Bond Index, respectively.

Historically, longer-term returns from stocks have compensated investors for enduring the discomfort of volatility in their portfolios. Volatility is the norm for markets—benign returns are actually much less common. From 1926 to 2018, annual returns between 5–15% occurred much less often. But these price swings pay off on average over longer periods. While daily returns have been positive 53% of the time, nearly 74% of all calendar-year returns are positive, and 94% of 10-year periods have been positive.** There also hasn’t been a negative 20-year period from 1926 to 2018.**

Emotional Investing Errors

It is scary to watch your retirement savings drop in value significantly. But short-term corrections can lead to hasty decisions. And when your emotions are elevated, making rational financial decisions can be difficult without a long-term plan.

So before you make any investing decisions, ask the time to reflect on these common emotional fallacies. Catching yourself before you act on one could be the difference between meeting and missing your retirement goals.

  • Myopic loss aversion: We experience twice as much pain from financial loss as pleasure from similar sized gains.
  • Confirmation bias: Investors often look for information that confirms their beliefs and ignore evidence contradicting their beliefs.
  • Overconfidence: An overconfident investor believes their decision is correct even if it isn’t. They may abandon their longer-term plan because they feel they “know better”.
  • Searching for “safe havens”: Fear of losing money in volatile times can lead investors to find strategies or investment vehicles that avoid volatility. More on the dangers of safe havens below.

Trying to Time the Market

To avoid feeling the sting of investment loss, investors may try to time the market. But this can be symptomatic of overconfidence and can leave room for errors, such as:

  • You could miss the best days in the market.
  • You may face higher transaction costs from selling and buying stocks frequently.
  • You could have potential tax liabilities due to an increase in transactions.

Tempting Investments During Volatility

The fear of market volatility can also lead investors to seek safe havens to protect their savings. While these “safer” investments may be less volatile than stocks in some cases, they may present other risks.

Annuities. Annuities are typically sold as dependable investments with predictable returns and guaranteed income no matter what the market does. This prospect can sound appealing, but annuities’ often-high fees, surrender penalties and ineffectiveness at combating inflation can limit your ability to pay for a comfortable retirement.

Fixed income investments. Fixed income vehicles may also appear safe from risk, but they tend to generate lower returns over a longer time horizon. If you allot most of your portfolio to fixed income investments, you can lose purchasing power over time due to the rising cost of living.

Retirees often believe they can avoid risk by investing in bonds. But even bonds carry risks.

  • Default risk: If the bond issuer defaults, you risk losing a portion of or even your entire principal investment.
  • Reinvestment risk: If you depend on steady bond income, there is a risk your interest payments may be reinvested at a lower rate of return. This happens when a bond’s price appreciates, and its yield, which moves inversely to price, falls.
  • Interest rate risk: Rising interest rates may cause bond prices to fall. If you have an immediate need to convert some of your bond investment into cash, you may end up selling shares below the price you originally paid for them.

How to Have a Comfortable Retirement

Volatility is the price you pay for longer-term investment returns. By attempting to dodge it, you may inadvertently undermine your longer-term retirement strategy. Volatility can be stressful because it feels like your comfortable retirement income stream is under threat. But a well-planned portfolio suited to your retirement goals can help you stay disciplined.

For more information on creating a tailored retirement portfolio, contact Fisher Investments.


*Source: “Quantitative Analysis of Investor Behavior, 2018,” DALBAR, Inc. US stocks and bonds are represented by the S&P 500 Index and Barclays Aggregate Bond Index, respectively.

**Source:Global Financial Data. Stocks as measured by the S&P 500 Total Return Index from 12/31/1925–12/31/2018.

Investing in securities involves a risk of loss. Past performance is never a guarantee of future returns.
Investing in foreign stock markets involves additional risks, such as the risk of currency fluctuations.