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.
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.
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.
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.
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.