Market Volatility Got You Worried?

By: Conor O’Malley

Market volatility can be unsettling, especially for those approaching retirement. Watching the market swing up and down might feel like your hard-earned savings are at risk. You’ve put in decades of work to build a stable nest egg, and the last thing you want is to see it depleted by unexpected downturns. But rest assured, there are proven strategies to help you navigate these uncertain times with confidence. Protecting your savings can be attainable through smart planning, informed decisions, and proactive risk management.

Defining Market Volatility:

Market volatility refers to the frequent and rapid movement of stock prices. While some investors find opportunities in these fluctuations, others — especially those nearing retirement — might feel a spike in anxiety with every dip. When it comes to retirement savings, understanding market volatility is essential, as it directly affects the value of investments that may be vital to your future financial security.

The ups and downs of the market often come as a response to economic shifts, global events, and even psychological factors influencing investor confidence. While some level of volatility is normal, extreme fluctuations can be particularly risky for those who don’t have the time to wait out a potential recovery. That’s why developing a strategy that considers both long-term growth and downside protection is key.

How Volatility Impacts Your Retirement Savings

For retirees or those close to retirement, sudden market drops can impact their portfolios significantly. When a market downturn hits, retirees often feel the impact more severely because they typically rely on their savings for income. This means that withdrawing funds during a downturn not only can reduce your savings but also may limit their ability to recover when the market eventually rebounds.

In technical terms, this is known as "Sequence of Returns Risk" — the danger of withdrawing from a portfolio during periods of poor market performance. For example, if a retiree has to withdraw funds during a bear market, the negative impact on their balance can be disproportionately larger, potentially requiring years to make up the loss.

Why This Matters

Without an adequate buffer against market drops, your nest egg might shrink faster than anticipated. Those in retirement or nearing it generally have less time to recover from downturns, making it all the more important to shield investments from excessive volatility. Protecting your nest egg is not just about preserving what you have but aiming to ensure that your income can last through your golden years.

Resilient Retirement Strategies

Luckily, there are smart and effective strategies that can help you withstand volatility. Here’s a look at some methods that our team CERTIFIED FINANCIAL PLANNERS™ often recommend to safeguard retirement savings:

Diversify Your Portfolio

Diversification is about spreading investments across various asset classes to avoid overreliance on a single sector or stock. With a diversified portfolio, you can balance the risks associated with each asset class. By combining equities, bonds, real estate, and other investments, you can create a safety net. During market volatility, bonds or other fixed-income investments may provide stability, positioning your savings to hopefully offset potential losses in the stock market.

Incorporate Low-Risk Assets

Many CFPs suggest adjusting portfolios to include low-risk or defensive assets as you approach retirement. Treasury bonds, high-grade corporate bonds, and cash equivalents like money market funds are examples of low-risk investments. Including these in your portfolio can help to reduce exposure to market shocks, potentially giving you a more stable foundation for withdrawals during uncertain times.

Using a “Three Bucket Strategy”

The bucket strategy divides assets into three categories: Smart Growth, Protected Growth, and Cash buckets. 

1. Smart Growth takes on a moderate level of risk, allowing for an inflation hedge for the long-term. Long-term assets, typically in equities, tend to have higher growth potential and can recover from downturns given enough time.
2. Protected Growth investments focus on providing stability and some sort of protection from market losses. 
3. The Cash bucket is utilized to fund your retirement expenses.

When markets are doing well, the Smart Growth bucket funds your Cash bucket. When markets experience turbulence, withdrawals from the Protected Growth bucket are used. 

1. Set a Sustainable Withdrawal Rate
   1. Knowing how much to withdraw annually is crucial in maintaining your portfolio. A common rule of thumb is the "4% rule," which suggests withdrawing 4% of your retirement savings annually to help sustain your nest egg throughout retirement. Adjusting this rate based on market conditions — for instance, withdrawing less during market downturns — can extend the longevity of your assets.
2. Consider Annuities for Added Stability
   1. For some, an annuity can offer peace of mind as part of their retirement strategy. Annuities aim to provide a steady income stream, which can reduce reliance on volatile markets. However, choosing an annuity requires careful consideration, as there are various types, each with specific terms and fees. A CERTIFIED FINANCIAL PLANNER™ can help you assess if an annuity fits within your financial goals and risk tolerance.
3. Work with a CERTIFIED FINANCIAL PLANNER™
   1. A CFP provides expert guidance tailored to your retirement goals. They analyze your unique financial situation, considering not only market conditions but also your risk tolerance, time horizon, and income needs. At RetireUS, our CFP® team can help you create a flexible plan that adjusts as the market changes, so you can feel confident no matter the economic climate.

Conclusion: Be Prepared, Not Surprised

You’ve worked hard to build your retirement savings, and protecting it is worth the effort. Although the market can be unpredictable, you have control over how you respond. By diversifying, setting sustainable withdrawal rates, and working with a financial professional, you can create a robust plan to help weather market volatility.

If you’re ready to get a clear picture of where you stand, take our Financial Checkpoint Quiz to assess your current strategy and identify any gaps. Don’t let uncertainty hold you back from a secure retirement. Connect with one of our CERTIFIED FINANCIAL PLANNERS to discuss your goals, explore personalized solutions, and feel prepared for whatever the market brings.

This article is provided by McAdam LLC dba RetireUS (“McAdam” or the “Firm”) for informational purposes only. Investing involves the risk of loss and investors should be prepared to bear potential losses. Past performance may not be indicative of future results and may have been impacted by events and economic conditions that will not prevail in the future. No portion of this article is to be construed as a solicitation to buy or sell a security or the provision of personalized investment, tax, or legal advice. Certain information contained in this report is derived from sources that McAdam believes to be reliable; however, the Firm does not guarantee the accuracy or timeliness of such information and assumes no liability for any resulting damages. This article is the sole opinion of this individual and is not indicative of the firm’s belief.