This week has been another extremely turbulent one in the stock market. While it is never comforting to see large, red numbers, volatility can be even more uncomfortable for recent retirees or those considering retirement. A colleague of mine recently told me that he has seen more of his clients retire in the last two years than in his first ten years of working at SWP. This got me thinking a lot about the notion of retirement. Retirement is a huge life event and adding volatile markets can compound the feeling of uncertainty. In this article, I will share some of the concepts we have been discussing with our clients.
Do not stress the ups and downs
I know that saying “don’t stress the ups and downs” is one of those “way easier said than done” situations, but I firmly believe it. Markets are volatile, especially over a shorter-term time frame. Still, it is a very rational response to feel uncomfortable with drops in account values. And these feelings can be amplified when a major life event like retirement is underway or on the horizon.
But our clients can take solace in the fact that we have designed an asset allocation strategy that is intended to work across bull markets, corrections, bear markets, and recessions. It is part of our process with clients to build an asset allocation based on many factors, like what they want their life to look like in retirement.
Keeping a longer-term perspective can help with reassurance. Through June 30, 2022, the S&P 500 bottomed at -20%, but if you look at the trailing 5-year return ending the same period, the index has still averaged ~+11% per year.[1] The point is that just because the market may be down right before or after retirement does not mean it will continue to be that way forever.
Identify planning opportunities
Typically, clients will be in some of the lowest income years of their life right after retirement. In many cases, retirement occurs before required minimum distributions (RMDs) kick in and sometimes even before social security income has been taken.
These circumstances provide an ideal time to explore a Roth conversion, assuming one has traditional pre-tax retirement assets. This strategy is a great way to take advantage of downward market volatility. By converting depreciated investments in a tax-deferred account to a tax-free one, you can pay income tax on “discounted” assets. This could result in huge savings when extrapolated over multiple years.
Often, we couple these Roth conversions with Donor Advised Fund contributions to reduce or eliminate tax consequences. Donor Advised Funds are a powerful tool used to pre-fund investor’s charitable giving. Since it allows for contributions of securities in-kind to fund the account, investors can benefit from the tax deduction and avoid capital gains on highly appreciated assets. So far, we have only discussed volatile markets when markets are negative. If markets trend upwards, it presents a great opportunity for a Donor Advised Fund contribution.
Lastly, down markets create opportunities for tax-loss harvesting, which can help offset market declines by reducing your tax bill for the year. It seems counterintuitive to realize losses, but it is one of the most powerful strategies we can tap into when markets are down.
Explore non-traditional investments
Non-traditional investments such as alternative investments, whose value is not as closely tied to traditional capital markets as stocks and bonds, can be a great way to potentially minimize the impact of market volatility on your retirement savings.
In a year when stocks and bonds are down double digits, alternative investments present the opportunity to diversify further. We view alternative investments as a creative solution to expand investment choices beyond stocks and bonds. Ideally, alternative investments will not be as correlated to traditional markets. They can serve as an aid in dampening portfolio volatility in turbulent markets, and in certain cases, may be able to generate positive returns during challenging times. Our Chief Investment Officer, David Copeland, wrote a great blog detailing how we define alternative investments and why we use them.
Keep your advisor in the loop
Most people do not wake up one morning and decide to retire. Usually, by the time they reach that decision, they have already thought about it for at least a year, if not longer. Despite this, many people do not tell their wealth advisor that they are considering retirement until they are just a couple of months away from the big day!
As soon as you start thinking about when to exit your career, your advisor should be one of the first calls you make. Your advisor can help ensure you take the correct strategic steps leading up to your retirement, and into the “decumulation” phase of life. The same goes for when markets are volatile. We are here to help put things in perspective and to look at volatility as a source of opportunity, not something to be afraid of.
We understand that retirement is a big decision, and market volatility is always a concern to investors and us too! We are here to help. Please reach out to your advisor with any questions.
[1] Source of returns: Morningstar Direct Trailing returns. Past performance does not guarantee future results
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This article contains general information that is not suitable for everyone. The information contained herein should not be constructed as personalized investment advice. Reading or utilizing this information does not create an advisory relationship. An advisory relationship can be established only after the following two events have been completed (1) our thorough review with you of all the relevant facts pertaining to a potential engagement; and (2) the execution of a Client Advisory Agreement. There is no guarantee that the views and opinions expressed in this article will come to pass. Investing in the stock market involves gains and losses and may not be suitable for all investors. Information presented herein is subject to change without notice and should not be considered as a solicitation to buy or sell any security.
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