Photo credit: www.kiplinger.com
As you approach retirement, navigating through various uncertainties becomes integral to your planning. You may find yourself contemplating the timing of your retirement, potential activities during this new phase, and strategies for generating a reliable income.
One major concern during this period is the impact of market fluctuations, specifically bear markets and corrections.
The reality is that market volatility can significantly impact retirees. Even those who enter retirement during favorable market conditions may face abrupt changes, illustrated by the severe drop in the S&P 500 index, which plummeted 34% between February 19 and March 23 of 2020 amid the COVID-19 crisis.
Understanding Market Risks in Retirement
Studies indicate that individuals retiring at the onset or during a bear market are particularly susceptible to adverse investment returns early in their retirement journey. This effect, known as sequence of return risk, can lead to withdrawals from diminished retirement accounts, jeopardizing the longevity of retirement savings.
Compounding this issue are emotionally-driven investment choices that can exacerbate financial challenges. Although predicting market trends is inherently uncertain, you can control your responses to fluctuations. This becomes progressively crucial as you transition from earning a paycheck to relying on your savings.
Alarmingly, 63% of respondents in a recent Allianz Life survey expressed greater concern about outliving their savings than facing death itself.
This article aims to illuminate the role of a disciplined investment and income strategy in mitigating financial fears during retirement.
Developing an Investment Policy Statement
Establishing a robust retirement strategy with defined guidelines for financial decisions can significantly alleviate future uncertainties related to funding your lifestyle and how you will react to unpredictable market conditions.
Emotional responses to market downturns can undermine a retirement plan more swiftly than external economic factors. A well-conceived plan that addresses risks like sequence of return risk, accompanied by steadfast adherence to it, lays the groundwork for a disciplined retirement. An investment policy statement serves as a crucial reminder of your objectives and the rationale behind your investing strategies, potentially determining your financial success.
Drawing from my experience as a U.S. Marine Corps veteran, I emphasize the importance of discipline and planning when facing difficulties. Adopt a similar mindset when crafting your investment strategy.
Ultimately, a retirement plan’s effectiveness hinges on proper execution, empowering you to maintain a stable financial path as you seek a sustainable retirement.
Your Personalized Investment Policy Statement
Institutional investors often utilize investment policy statements to outline regulations governing their investment portfolios.
By formulating your own investment policy statement, you detail how your retirement savings will be allocated to meet your financial needs.
This document should outline your strategy for managing potential bear markets, tailored to your financial situation and aspirations.
For instance, you might allocate sufficient funds in a low-risk account to cover several years’ worth of expenses, thereby avoiding the need to liquidate stocks during an economic downturn.
Alternatively, you may have fixed income investments or annuities that generate adequate income to support you without necessitating stock sales in adverse market conditions.
Interested in insights to enhance your wealth management? Subscribe to Building Wealth, our free bi-weekly newsletter.
Regardless of the approach you choose for navigating bear markets in retirement, the critical aspect is crafting a plan in advance and documenting it clearly.
Ensure that your investment policy statement is easily accessible, allowing you to refer to it during challenging times, as opposed to reacting impulsively to market pressures.
If you are married, collaborate with your spouse on this document, ensuring that both partners commit to the planned strategy. This partnership can be invaluable when one partner feels anxious; the other can remind them of the agreed-upon plan.
The Importance of Written Plans
Documenting your decisions reinforces your commitment to your investment strategy beyond mere conversation. Consider framing your investment policy statement and keeping it in a visible location to continually remind yourself of your objectives and motivations.
It’s never too late to create an investment policy statement. By engaging with your spouse, you can set boundaries for investment decisions, reducing the likelihood of impulsive decisions that could lead to regret later.
Source
www.kiplinger.com