Top Tips for Retirement Planning Clients to Survive Market Volatility

Retirement (10)
The beginning of 2016 has proven to be as every bit volatile as the summer of 2015, serving as a reminder that volatility in the market is inevitable. Current volatility is due, in part, to the current price of crude oil along with global recession fears and possible Federal Reserve actions. Market returns will also be impacted by flatter company earnings going forward, as well as continued market instability in China and a possible global currency war slowing unfolding worldwide.
It’s important to manage retirement planning expectations with clients regarding their future stock returns. Prudent financial advisors will communicate to clients that volatility should be expected on the horizon and possibly for some time to come. Whether retirement planning professionals have communicated the expectation of a volatile start to the 2016 markets or not, the volatility is sure to cause quite a bit of anxiety among their retiree clients.
Recent surveys have reported that up to 60% of retirees are concerned about recent events in the investment markets and their potential impact on retirement security. The recent bumps in the road early in 2016 should serve as a warning for clients and retirement planning professionals alike to plan for and minimize risk to client retirement security. Here are some tips that can assist retirees in minimizing the impact of this volatility on their retirement planning efforts.
1) Do Not Deviate From the Plan
Sustained volatility can shake even the most experienced of investors. This isn’t an exciting plan, there’s not much action with just steadying the ship and staying on track, but it’s likely a sound plan of action given the current market environment. Volatility is the major vehicle driving bad investment behavior. It can cause clients to panic, to buy high, and to sell low and harm long-term returns in a short period more than virtually any other variable. It is not uncommon for retirees to panic and let emotion take over when they see market drops, divesting in strong assets likely to stabilize once volatility subsizes.
2) Reduce, Where Possible
Retirees often need to sell their investments to boost income streams and pay expenses. However, during periods of high market volatility, selling these investments creates a unique scenario that only retirees experience called “sequence of returns risk.” This is a unique situation because until those withdrawals against investments are made, it poses no risk to a client’s portfolio.
Encourage retirement planning clients to resist selling stocks right after significant market volatility or a downturn. This is important because selling locks in lower returns, possibly creating a negative long-term impact on their investment portfolio. It could even impact the longevity of the portfolio itself. It might be prudent to trim expenses and reduce market withdrawals whenever possible to ensure that the client’s portfolio will last through their retirement.
3) Develop Income Streams Not Dependent on the Market
It’s important to assist clients in developing income streams that are not market dependent. This might seem more difficult than is truly is. If a retiree is worried about the longevity of their portfolio, there are several options to that can be included in a plan, if it comes to that point. Home equity is a possible variable that fits into this equation. Reverse mortgage products available on the market now can be used to create this type of non-market income stream, specifically, HECM lines of credit. These products are relatively cheap to set up and can create a permanent source of retirement income to be used whenever markets become unstable. Used correctly, these products can assist retirement planning clients and help prevent them from selling stocks during a market downturn. Using home equity effectively can help weather the impact that volatile markets have a retirement portfolio, so long as the strategy is taken into consideration well in advance of needing the additional income stream so that desperation or fear play no roles in the process.
4) Build up liquid emergency use funds
Similar in approach to using home equity or reverse mortgages to create income streams independent of market conditions, creating emergency-use cash reserves can help during market downturns. Cash reserves can greatly help keep retirees on financial track while allowing them to continue to pay everyday expenses. The biggest issue in using this approach is determining how much money is necessary and appropriate for these instances and what or should be diverted from investments with higher returns. It’s likely that saving an entire year or more of expenses outside of the investment markets can cause long-term implications, like losing out on the investment potential of the cash invested in other vehicles. However, keeping a few months ii cash reserves on hand will help retirement planning clients weather the storms through any sustained volatile market conditions.
Retirement planning clients need to understand the effects that market volatility will have on their streams of income that come from the investment markets. Pensioners can rest a little bit easier, but for those that have 401(k) or IRA accounts, they are likely to be wrapped up in stock investments that are vulnerable to periods of market volatility, especially given the likelihood that mutual funds are part of the investment portfolio for 401(k) and IRA accounts. This can also cause anxiety among retirees, leading to rash decision making.
The need to reduce rash decisions in the face of sustained market volatility is essential for prudent long-term retirement planning. Developing a long-term plan, following that plan and not selling performing assets during market downturns but rather turning to alternative income-streams to weather the storm until volatility passes are among the easiest ways to ensure the longevity and performance of client retirement accounts.