MONEY MATTERS: Defending your retirement savings

MONEY MATTERS: Defending your retirement savings

For most investors, it’s no surprise that markets are subject to up-and-down fluctuations over time. And if you are investing with a long-term perspective, it’s pretty common for your portfolio to experience temporary declines in value. Given enough time, markets generally have shown an ability to overcome losses and help investors continue to accumulate wealth.

However, managing market declines is different if you are nearing, or in, retirement. Chances are your 401(k), 403(b) or other type of workplace savings plan represents one of your largest financial assets. You want to make sure a sudden market downturn doesn’t put you in a difficult position.

It takes time torecover fromlosses    

While much of our focus tends to be on news about stock markets performing well, the fact is that for investors, avoiding large losses can make a real difference. This is why many investors focus on determining their risk tolerance level and building a well-diversified mix of assets that reflects their risk preferences. As you grow older, you likely may want to reevaluate your investment risk. That’s because negative markets can be a lot more difficult to overcome if you are almost retired or you are already tapping your savings to meet current income needs.

Consider these examples that show what happens if there’s a market decline at the same time you are withdrawing 5 percent of the portfolio’s principal to meet retirement income needs:

If your portfolio sustains a loss of 20 percent from a combination of investment declines and portfolio withdrawals, your portfolio will need to earn a 33 percent return to overcome that loss in the following year. 

The challenge intensifies with a larger loss. If your portfolio loses 35 percent in total, it would take a 67 percent return in the next year to regain that lost ground.

This points to the importance of modifying risk in your workplace savings plan later in life, as you close in on the time when you need to count on that pool of money for income.

What to do before or duringretirement

If you don’t have time on your side – i.e., you are within five years of retirement or already retired and drawing down your assets, make a priority of reviewing the level of risk in your portfolio. That may mean reducing your holdings of equities within your broader asset mix.

Yet stocks may still need to play a role. Given the realities that your retirement may extend for two-to-three decades or longer, you need to put your portfolio in a position to grow, even modestly, to help meet income needs over that span of time. Depending on your views on risk, the stock component may represent 50 percent or less of your asset mix. You’ll likely want to consider increasing your holdings of fixed income, alternative investments, and cash to help mitigate the impact of short-term stock market swings.

The reality for most is that investing gets more complicated later in life. Talk to your financial advisor about how best to position your 401(k) or 403(b) portfolio to protect your long-term financial security.

Jeff Jolly, CFP, is a Private Wealth Advisor and Sr. Vice President with Ameriprise Financial Services, LLC, in North Haven. He specializes in fee-based financial planning and asset management strategies and has been in practice for 16 years. To contact him, call 203-407-8188 ext. 330. 

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