Investing After Retirement:

Retirement can bring many changes and challenges. You’re no longer bringing in the same income as you did during your working years. Yet you still need to have enough cash flow to fund living expenses after you retire. No one wants to find themselves unable to financially support themselves during retirement.

You may have different sources of income during retirement to meet those needs: annuity payouts, a pension, Social Security benefits or investments such as stocks or bonds. If you need growth in your portfolio after you retire to provide cash flow, keep pace with inflation or meet other growth needs, you’ll likely invest some of your assets in the stock market. That means you’ll need to be able to endure market volatility.

Market Volatility Is Normal

Stocks’ long-term price gains rarely occur in a straight line. The stock market will often encounter bumps or drops along the way, some of which are known as corrections. Corrections can be defined as short, sharp, sentiment-driven overall market drops of about 10–20% that begin and end without warning. Because they are usually triggered by fear, they can be sharp and swift. But because corrections have no fundamental cause, prices could quickly resume their bullish trends when they are over.

These temporary short-term declines are part of the “wall of worry” that often propels the stock market toward greater heights. Bull markets are 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 the bull market. As bull markets continue to rise past those fears, they climb the “wall”. These worries, fears and corrections can be uncomfortable to experience, but all corrections eventually end.

While there may be appropriate times to pull out of equities, leaving the market in reaction to a correction or volatility is likely not be the most appropriate plan to meet long-term investment needs. Investors who are able to stay disciplined through corrections or other periods of market volatility can be rewarded with future bull market returns.

Coping with Volatility

Having the discipline to stick with your investment strategy can be difficult, especially during times of market volatility. What can retirees do to stay disciplined? It can be helpful to be aware of some of the emotional tendencies that could affect the way you invest.

• Myopic loss aversion: Humans have evolved to forget past pain relatively quickly. We hate losses more than we love gains. A study involving a sample group of US investors found the pain of loss felt by investors was approximately two and a half times greater than positive responses to equivalent gains. Behavioral finance has a name for this bias: myopic loss aversion.^[i] This means we fear losses, investment-related or otherwise. 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.
• Recency bias: 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 volatility loss may be likely to think that 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.

When short-term volatility hits, you have a choice—tough it out or hedge, trade or take some other action. While it may be difficult to tough it out as you watch your portfolio value decline, it could be optimal for your long-term financial goals. As a retiree, you may depend on your retirement portfolio to meet some of your cash flow needs. Say the stock market becomes volatile and your portfolio value drops. You might react by moving into cash or reallocating your assets into bonds or other investments you consider to be safer. If you pursue this strategy and miss being invested during the period when stocks recover, you may have negatively impacted your portfolio’s growth. If you frequently change your investment allocation, you could compound that effect.

How Can You Overcome Some of These Investing Mistakes?

• Focus on your long-term retirement goals and needs: Ideally your investment portfolio has an asset allocation (stocks, bonds, cash, or other securities) appropriate to reach your goals. Changing that asset allocation in the face of volatility can be risky. If you don’t allocate your portfolio for the appropriate amount of growth you need, your portfolio could fail to meet future withdrawal needs. 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 and enduring the higher short-term volatility. The S&P 500’s long-term average annualized return of 9.9% includes all corrections and bears.^[ii] You can take advantage of stocks’ long-term returns without attempting to avoid or react to volatility.
• Evaluate your retirement cash-flow needs: You will likely need to make withdrawals for living expenses from your portfolio during retirement, even in times of volatility. But if you are considering 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.

Meeting Your Retirement Goals

If you pull out of the market for emotional reasons, you may not get back in at the right time. You could also be tempted to hold on to the cash indefinitely. Both scenarios could hurt your chances of having enough income in retirement if you need asset 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.

Investing during retirement can seem difficult at times. Maintaining a rational or emotionless strategy can be difficult, especially during times of market volatility. If you need help controlling those emotional responses and sticking to your strategy, you may 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 planning in retirement. To find out more about how Fisher Investments could help you, give us a call or download one of our educational guides.

^[i] Source: Daniel Kahneman and Amos Tversky, “Prospect Theory: An Analysis of Decision Under Risk.” Econometrica, Volume 47, Number 2 (March 1979) pp. 263-291.

^[ii] Source: Global Financial Data, as of 1/2/2019. Statement based on S&P 500 monthly total returns since 12/31/1925.