Protecting Your Retirement Income During Market Volatility
By: Michael Carbone, CFA, CFP®
Market volatility can be a cause for concern when it comes to your retirement income. It's important to take steps to safeguard your financial security and ensure long-term success. In this blog post, we will explore practical strategies to help you navigate the ups and downs of the market and protect your retirement income.
1. Diversify Your Investments
In your search for financial stability in retirement, diversification is always your anchor. By allocating assets across a variety of investment classes, such as stocks and bonds, you can mitigate the impact of volatility on your portfolio. Diversification creates a buffer, allowing some investments to potentially flourish while others may be facing headwinds.
Embrace Asset Allocation
The cornerstone of any well formulated retirement strategy is a robust asset allocation. This is your mix of investments between different types of investments i.e., asset classes, and may result in significantly less volatility on your financial assets. Properly allocated assets can significantly improve the odds of preserving your income.
To achieve this balance, I believe investors should seek to understand the optimal mix between growth-oriented investments, income-producing, and preservation investments. The proper allocation should ultimately align with your:
- Need to grow your money to offset ongoing/future spending and inflation.
- Need to spend your money over the near term i.e., your liquidity needs, and
- Willingness to experience swings when the market gets bumpy.
It’s important to note that each of the above considerations may trade from the other. For example, greater growth needs would suggest more risk in your portfolio; however, if you also had very high near-term spending needs, it would suggest the opposite. The goal of this process is to find the optimal balance, based on your situation. If your goals don’t align with your financial capacity for accepting risk, they should be reevaluated.
Consider Income When Selecting Specific Investments
Once you’ve determined the appropriate mix of different types of investments, you’ll need to determine which specific investments to implement. It’s important to carefully select the investments you’ll be using to implement your asset allocation.
Retirees commonly favor investments that offer a stream of income as a source of investment return. For example, many stock investments pay dividends. Although dividends are by no means guaranteed, they can sometimes offer a reliable stream of income, even during recessions. Diversified dividend stock investments may be likely to continue paying some level of dividends during stressful economic periods, but it’s worth investigating how dividends of individual companies have historically held up during past recessions – should you choose to invest in individual stocks.
Consider Carving Out a Guaranteed Bond Ladder
Bond Investments can generally be purchased through different vehicles – they can be purchased on an individual basis or through more diversified products such as mutual funds or exchange traded funds. While fund-type products can be helpful for achieving diversification, they can also make it more challenging to manage market-related risks driven by interest rates i.e., bond prices fall as market interest rates rise, and vice versa.
Although I do believe diversified bond products may be useful for achieving diversification and attempting to earn higher bond returns, I also believe many retirees may benefit from carving out a portion of their overall bond allocation and build a 1 through 5- or 7-year guaranteed bond ladder. Why? Because changing market interest rates are less relevant when you’re holding an individual bond to maturity. So, by purchasing a guaranteed bond ladder with Treasuries or Certificates of Deposit, retirees may increase their ability to fund short-term spending needs, regardless of changes in market interest rates.
2. Remain Focused on The Long-Term
During periods of market volatility, it's important to stay focused on your long-term goals and avoid making impulsive decisions based on short-term market fluctuations. Short-term market moves are notoriously difficult to predict successfully over time. Why? Because investors bid on the price of an investment based on their expectations for what may occur in the future. Over the short term, stock prices will move based on changes in sentiment or the aggregate consensus of investors. So, to consistently predict short-term moves, you not only have to predict what may occur in the future, but also what other people have predicted, and how they’ll react if they’re right or wrong. This is no easy feat – even for the smartest investors.
Instead, I believe it’s better to maintain a disciplined approach and stick to your investment strategy. Remember that investing in retirement is a marathon, not a sprint. By staying committed to your long-term goals, you can ride out the ups and downs of the market and increase your chances of achieving long-term success.
3. Consider Guaranteed Income Options
To protect your retirement income, some investors may consider incorporating guaranteed income tools into their financial plan. Annuities, for example, can provide a steady stream of income that is not affected by market volatility. By allocating a portion of your retirement savings to annuities, you can ensure a reliable income source throughout your retirement years.
Annuities often get a bad rep – and for good reason. They’re expensive, hard to get out of and almost always difficult to understand. Their distributors are also handsomely compensated. This combination of attributes unfortunately sets them up perfectly to be used as a predatory sales tool.
I believe that annuities may potentially be appropriate if they’re fully understood – and are being used by those uncomfortable with risk and hoping to hedge longevity, not to pursue growth objectives. I believe that many annuity products offer investors long-term returns that may be commensurate with government bonds + a marginal premium.
4. Maximize Social Security Benefits
Maximizing Social Security benefits is an important step to protecting retirement income during periods of market volatility. By carefully planning and optimizing the timing of when to claim Social Security, retirees can enhance their monthly benefits, providing a stable and guaranteed source of income. Unlike investment portfolios, Social Security benefits are not subject to market fluctuations, making them a reliable foundation for retirement income. If you’re interested in taking a deep dive into how to maximize your benefits, feel free to watch this video I’ve created.
Conclusion
Market volatility is a natural part of investing, but it doesn't have to jeopardize your retirement income. By diversifying your investments, focusing on long-term goals, considering guaranteed income options and being smart about Social Security, you can protect your retirement income and achieve financial security in the face of market fluctuations. Remember, planning ahead and taking proactive steps can make all the difference in ensuring a successful and worry-free retirement.
If you feel that you’d benefit from a complimentary consultation, click this link to answer a few questions. If you’re a good candidate for setting up a call it will bring you directly to my calendar to schedule some time.
I wish you the best of luck and hope to hear from you soon!
Michael
Important Disclosures
Securities offered through Raymond James Financial Services, Inc. Member FINRA/SIPC. Investment advisory services are offered through Raymond James Financial Advisors, Inc. Eppolito Financial Strategies, LLC is not a registered broker/dealer and is independent of Raymond James Financial Services.
Certified Financial Planner Board of Standards, Inc. owns the certification marks CFP® and CERTIFIED FINANCIAL PLANNER™ in the U.S.
Stocks offer long-term growth potential but may fluctuate more and provide less current income than other investments. An investment in the stock market should be made with an understanding of the risks associated with common stocks, including market fluctuations and the potential loss of principal.
Investing in fixed income securities (aka “bonds”) involves certain risks such as market risk, if sold prior to maturity, and credit risk, especially if investing in high yield bonds, which have lower ratings and are subject to greater volatility. All fixed income investments may be worth less than original cost upon redemption or maturity. Bond prices fluctuate inversely to changes in interest rates. In other words, if interest rates rise after your purchase, you may receive less than your purchase price should you liquidate early, and vice versa. Bonds provide a fixed rate of return if held to maturity.
Brokered Certificates of Deposit (CDs) are “bond” instruments (aka “fixed income” securities). Most CDs pay interest semi-annually to your account. In most cases, early withdrawal may not be permitted; however, CDs can be liquidated in the secondary market subject to market conditions. Bond prices fluctuate inversely to changes in interest rates, such that you may receive more or less than you originally invested should you redeem early. In other words, if interest rates rise after your purchase, you may receive less than your purchase price should you liquidate early, and vice versa. Bonds provide a fixed rate of return if held to maturity. CDs are insured – subject to FDIC insurance limits. Brokered CDs do not automatically reinvest upon maturity. We must have a verbal discussion.
Past performance is not indicative of future results and there is no assurance that any investment strategy will be successful.
Stock dividends are not guaranteed and are subject to change or elimination at any point without notice.
Any opinions are those of Michael Carbone - not necessarily those of Raymond James. The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that is accurate or complete. Expressions of opinion are as of this date and are subject to change without notice. Investing involves risk and you may incur a profit or loss regardless of strategy selected.
