Market Volatility and Your Retirement Savings
Date: August 14th, 2020

Market Volatility and Your Retirement Savings

We all wish that we had a retirement investment calculator that could give us the exact amount of money we will have at retirement. Especially in times like these when the market's volatility combined with the economic effects of the pandemic may have decreased the total value of your retirement savings. 

The idea of subjecting your hard-earned retirement savings to the whims of the market may make you cringe.  However, depositing cash in a bank savings account may not be in your best interest either considering the egregiously low-interest rates and potentially escalating inflation.  


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This means you may have to stomach some market volatility.  However, there is no reason to check your retirement savings balance on a daily basis to see how much it has increased or decreased.  Let your financial advisor do the work on your behalf, meet with this professional once every six months or once each year and you won’t feel nearly as uncomfortable about volatility as those who obsess over the ups and downs of the market on a daily or weekly basis.


Assess Your Risk Tolerance

Nowadays, just about every salaried worker has a 401(k) or IRA retirement savings account.  However, no two pre-retirees have exactly the same investing strategy.  Today’s investment tools are complex to the point that you can set your preferred risk level in an exact manner, ensuring your retirement savings are invested in stocks, mutual funds, ETFs and other vehicles suitable for your unique risk tolerance.  

As an example, those in their 30s and 40s are likely to favor growth stocks that are comparably volatile.  Those in their 50s and 60s are more likely to favor conservative investments that are significantly less volatile as these individuals are on the cusp of retirement.  There is no need to handpick specific stocks that are either conservative “safe havens” or risky growth-oriented companies.  Rather, you can simply lean on your financial advisor for guidance based on your age, level of savings, retirement goals, and risk tolerance. 


Resist the Temptation to Panic During a Bear Market

Though the stock market has an overarching upward trend across posterity, bear markets pop up from time to time.  It is important for pre-retirees to accept bear markets as a fact of life.  However, bear markets are usually temporary.  

Accept the fact that your retirement investments may briefly decline and then rise, only to decline again. If you are able to resist the temptation to sell and you may stand a much better chance of reaching your targeted age for retirement.  

In fact, based on your unique situation and current level of savings, a financial advisor may even recommend buying amidst market dips.  Some investors actually look forward to market declines as they perceive them to be opportunities to add to their investments rather than panic and divest.  

Attempting to Time the Market is Almost Always a Mistake

Market volatility will occur.  What matters most is how you react to this volatility.  Working with a financial advisor to create a financial plan is one of the best methods investors can use towards accomplishing their retirement and savings goals. Your advisor will work with you and your unique situation to assess your time horizon and risk tolerance and then 'stress test' your plan to see how it will perform under many different market scenarios. 


Combat Market Volatility With Diversification

If you absolutely dread the idea of holding onto your investments as they decline in value, you can mitigate the mental toll of bear markets by diversifying your portfolio.  Diversified portfolios may be less likely to suffer dramatic drops as risk is spread out across a litany of industries as well as risk levels.  

If you are like most people, you do not have the time nor the energy to select a wide array of meritorious stocks that are truly diversified in terms of risk, geography and industry.  This is where the assistance of your financial advisor proves invaluable.  Entrust a proven financial professional to help you choose the proper investment vehicles based on your tolerance for market volatility and you will rest easy at night knowing your hard-earned money is subjected to a level of risk you are comfortable with.


Exercise Discipline Before and After Retirement

Discipline is necessary both in terms of spending as well as withdrawals.  If you spend without regard for posterity, you will sacrifice long-term comfort for short-term pleasure, meaning you will have to work that much longer prior to retirement. 

Spending discipline must also be exhibited after retirement.  You may want to consider altering your yearly withdrawal from retirement savings in accordance with the rate of inflation.  Your financial advisor can help you anticipate the expected rate of inflation in the years ahead following the federal government’s wanton printing of money to stimulate the economy amidst the coronavirus pandemic.   

Those who are still saving for their “golden years” should know early withdrawals from retirement savings/investing accounts have the potential to prove quite costly.  Individuals younger than 59.5 who withdraw money from their 401(k) or IRA will be hit with a 10% penalty (but for the temporary coronavirus penalty-free withdrawal exemption).  

Furthermore, taxes must be paid on contributions as well as gains that are deferred.  The double-whammy of an early withdrawal penalty combined with taxation has the potential to reduce your savings by upwards of 40%.  This is just one example of the many financial pitfalls pre-retirees fall into when uneducated about the dynamics of investing for retirement.  When in doubt, do the smart thing by consulting with a financial advisor to ensure your decision makes financial sense today as well as in the months and years ahead.


Do not let Your Emotions Take Over

Speculation and emotion shape investing decisions more than most investors are willing to admit.  It is awfully easy to preach the merits of making rational investment decisions as opposed to emotion-driven decisions yet the truth is emotion is a significant part of life.  However, emotions are best left for the realms of romance, music, art and theater.  Try not to let your emotions shape your financial decisions.  

Cold, hard numbers and an in-depth analysis combined with investing advice from an experienced financial consultant should be the primary factors you consider when planning an investing strategy.  Let logic and rational thinking guide your thinking when planning for retirement and you are certain to emerge from your working career with quite the impressive nest egg.

For more ways to plan for the retirement you want, contact Prime Wealth Advisors for a complimentary consultation today. We are here to assist with full-service retirement planning to include: tax, estate, and wealth management. 

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