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Recent Market Volatility - A Sign of Things Ahead?

 recent market volatility sign of things to come

There is no doubt that individual investors were hit hard by the financial crisis. Several months of double-digit negative stock market returns almost halved investor portfolio values from April 2008 to March 2009, according to Netspar (the Network for Studies on Pension, Aging, and Retirement).

If you think losing a significant proportion of your nest egg sounds like a life event that would color future money choices, you might be surprised by a November 2017 survey.

When Hartford Funds asked people about the lasting impact of the market meltdown and the ensuing “Great Recession,” 40 percent of them said the financial crisis of 2008 has had no lasting impact on their life. A higher number though, 42 percent, said they now avoid the market. And 46 percent of respondents said they have adjusted their spending and savings habits in the aftermath. 

Interestingly, people have made investment and lifestyle changes in the wake of that momentous market downturn—including avoiding the market all together—yet the perception of its impact has faded for many. “Americans are forgetting what it felt like during those challenging times of 2008-11,” according to a Hartford Funds executive.

A Sign of Market Rumblings?

Billionaire Carl Icahn took to the airwaves during last week’s first market slide. He told CNBC that he believes there are too many exotic, leveraged products for investors to trade, and that "one day these securities are going to blow up the market."

The market is a "casino on steroids" with all these exchange-traded funds and exchange-traded notes, he said. “These funds, especially the leveraged ones, are the 'fault lines' that will eventually lead to an 'earthquake' on Wall Street. These are just the beginnings of a rumbling." He then added that he didn’t think this was the beginning of the end and that the market would very likely bounce back.

Other pundits have been more positive in their forecasts. Pointing to "strong investment profits," business gains from tax reform, and rising wages, economist Larry Kudlow believes that "the stock markets will be just fine." He observed that "there is some interest rate turbulence." But overall economic indicators suggest that people "shouldn't panic," he said in a recent interview.

More Positive Market Predictions

Likewise, New York Times senior economics correspondent Neil Irwin emphasized that other financial market indicators besides stock market volatility suggest good things ahead.

"For what really matters — the well-being of the economy and the ability for individuals and companies to prosper in the years ahead — look first to fundamental economic data, especially those that tend to be leading indicators," Irwin explained. "Second, look to the bond market and other financial market indicators that are more reliable measures of investors’ expectations than stock prices."

Irwin elaborated saying that this added up to "good news on both fronts, as both point to a global economy that will continue growing steadily in the months and years ahead, perhaps with inflation that is a bit higher than in the recent past."

With all this talk of market corrections versus market recovery, it can be a confusing time for a particular investor: the person trying to time their retirement strategy to result in an income-rich retirement and avoid a post-correction, bare-bones-income one

What's a Concerned Retirement Investor to Do?

Fretting over the recent ups-and-downs is certainly understandable. But on the backend, it's important to separate that emotion from any portfolio decisions.

If you are in your 50s or not-quite-retired working years, your time horizon for investing is shorter than that of other investors. Emotionally-charged choices could lead to setbacks in retirement income or other future goals for potentially years.

That being said, now can be a good time to see if your current financial plan can be enhanced with a nod toward retirement. Or there may be additional steps you can take toward preparing for your retirement goals. 

Even with the recent ups-and-downs of equity markets, many investors still have high balances in their retirement accounts. It's good to be forward-thinking and start working toward a proactive retirement income plan -- and this can be even more effective when asset values are healthy and high.

Waiting until some point in the future, when major volatility drives investment portfolios lower, could mean losses of money and time to recover from those losses. 

Sequence-of-Returns Risk - a Real Retirement Danger

This is exemplified by one of the many potential risks facing those trying to plan for a secure retirement: Sequence-of-returns risk.

"Sequence-of-returns risk" is defined as the risk of receiving lower or potentially negative returns by beginning to take your retirement income withdrawals at the bottom of a bear market. While the prices of portfolio holdings will rise when the market recovers, there will also be a reduction in an overall portfolio return because of how much had to be withdrawn in early retirement when prices were down.

By contrast, someone who retires when stock prices are high (and takes early withdrawals of fewer equities because they are worth more) will likely have a higher overall portfolio return.

This is because the high-stock-prices retiree has more equities left in that portfolio to earn returns later in retirement.

Sidestepping Sequence-of-Returns Risk

According to Wade Pfau, Ph.D., CFA, Director of Retirement Research at RetirementResearcher, “attempting to sustain a fixed living standard using distributions from a portfolio of volatile assets is an inefficient retirement income strategy.”

To better manage this risk, Pfau mentions a number of possible income strategies. For investors with a more conservative risk tolerance, two strategies may be of interest: building a "lifetime income floor" and using "buffer assets" for supplemental income.

Building a "Floor" Against Risk 

One of the strategies Pfau talks about to combat sequence-of-returns risk is income annuities to build a "lifetime income floor." A real-world example of this is having guaranteed annuity paychecks, in conjunction with Social Security and other guaranteed income sources, to cover your monthly living expenses. In other words, the guaranteed income supplements your fixed-income needs.

With this approach, you take care of your basic living expenses with what's essentially a guaranteed "floor" of income for life. Then other income sources can be allocated toward less frequent retirement expenses and the other costs of "nice-to-haves."

A Tax-Advantaged "Buffer Strategy"

Another strategy Pfau suggests is to have other assets available outside the financial portfolio to draw from after a market downturn, when the portfolio is otherwise down. He calls these "buffer assets."

Rather than holding enough cash to fund two to three years of retirement spending, which could be a drag on a portfolio and miss out on any potential equity growth, he suggests using a permanent life insurance policy. The policy could be used to generate buffer income from its cash value, which, in many cases, can be received on a tax-free basis.

Retirement Success Starts with Planning Today 

While the markets change and economic conditions evolve, you don't have to leave your future to chance. Now is a good time to start exploring well-thought-out income strategies and seeing what makes sense for your portfolio, goals, and future.

As you consider your plan, consider these additional findings from that Hartford Fund survey: 26 percent of respondents planned to work longer than they had hoped as a result of financial hardship related to the recession, and 25 percent planned to change jobs or take on additional jobs.

You don’t have to find yourself putting your long-dreamed-of retirement on hold. Professional financial guidance for your situation will help you better manage sequence-of-returns risk, not to mention other risks in retirement.

When you are ready, financial professionals at stand ready to help you. Use our "Find a Financial Professional" section to connect with someone directly. Should you need a personal referral, call us at 877.476.9723.

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