The gains in the market have lasted for 15 straight months, and now the thrill of the ride has been swept from under our feet. I have started to go through my own catharsis with the stages of grief. The denial was the most fun, I have to admit. Like adolescents, we all started this arduous journey with disbelief and a laissez-faire attitude. I might have even been a tad rebellious. Of course, being of Middle-Eastern descent didn’t help; I had always stood strong against the control taken from myself and my sisters as we grew up. I wasn’t going to let this disease stop me.
We rolled our eyes at the first people who wore masks. We insisted that this would be over in a week, and many even compared this pandemic to a flu. We were brazen…until we started to witness local businesses close before our eyes. An invisible enemy laser-focused on taking our health and our livelihoods.
We did purposeful planning and things as simple as beneficiary check-ups so that we were always sure to have all bases covered. These are the times we did all of these things for. The power of having a plan elevates you from the pandemonium of a pandemic. We don’t know how long this will last and we don’t know if it will rear its ugly head once more with a vengeance. But here is what we do know: A volatile market could have you rethinking some long-held retirement plans. Before you make any moves, take these steps to check your plan and/or put it back on track.
Step 1:
Stress-Test Planned Withdrawals
The key determinant of retirement readiness is balancing withdrawals to supply enough money to live on, but not imperil your plan’s sustainability. If your balance has dropped, assess whether a 3%-4% initial withdrawal amount is enough to supply your desired living expenses. Additionally, because the market could drop even further, it is reasonable to stress-test withdrawals even further.
Step 2:
Weave in Your Social Security Strategy
It is a good sign if your portfolio withdrawals look sufficient after factoring in the potential for further losses. However, you should also maximize non-portfolio income sources like Social Security. Enlarge your eventual benefit by delaying Social Security filing. After all, the roughly 8% guaranteed benefit increase is difficult to match with investment products.
Step 3:
Determine Whether You Need to Course-Correct
If your plan looks uncomfortably tight based on your findings from Steps 1 and 2, there are a few adjustments you can make to get it on track. The most obvious is to delay retirement, continue making contributions, and defer spending from your portfolio. Deferring withdrawals helps ensure that you are not pulling from a declining portfolio; and making additional contributions can add up. Also take time to consider your in-retirement budget. Downsizing and/or relocating to a different geography can deliver a high payoff.
Step 4:
Assess Your Asset Allocation Relative to Your Drawdown Plan
Turn your attention to your portfolio’s asset allocation based on your proximity to retirement and your planned spending. Focus on your portfolio’s weighting in cash and high-quality bonds. The yields on such investments have shriveled, but bonds and cash have historically held their value in periods of equity market weakness.
Step 5:
Take Steps to Improve Your Tax Position
With balances down, converting a portion of traditional IRA assets to Roth can make sense, in that you will have more assets available that are not subject to taxes or required minimum distributions upon withdrawals. However, IRA conversions are not for everyone; some investors are better off paying taxes in retirement, at lower tax rates, than when they are working.
I spend my life and my love planning for the people I care about most.
Nina Azwoir, First Vice President of Investments, Wintrust Wealth Management. © Morningstar 2020. All Rights Reserved. Used with permission. Securities, insurance products, financial planning, and investment management services offered through Wintrust Investments, LLC (Member FINRA/SIPC), founded in 1931. Trust and asset management services offered by The Chicago Trust Company, N.A. and Great Lakes Advisors, LLC, respectively. Investment products such as stocks, bonds, and mutual funds are: NOT FDIC INSURED | NOT BANK GUARANTEED | MAY LOSE VALUE | NOT A DEPOSIT | NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY.