Retirement is to be a time for enjoyment of the fruits of our labor. Granted, it is the last chapter of our life, but it is the ideal time for your skills and interests to be given expanded attention. Many of our clients are retired and from our vantage point we see a variety of lifestyles during the retired years. Some of you get so busy you will say to us, “I don’t know how I ever had time to work.” Besides leisure time, some of you are very active in volunteer service projects. Regardless of how the time is filled, most of us rely on our investment portfolios to supplement our new lifestyle.
With 2015 providing few gains and 2016 beginning with a sharp selloff retesting August lows, it is pertinent to consider the math difference in market volatility during retirement. Before you retire, you are accumulating assets by making annual deposits supplemented often by an employer. When the market goes down in a quarter, the accumulator often does not notice it because the value may have increased due to contributions. I have heard several times in a down market that a client’s qualified retirement plan (401k, 403b, etc.) was doing better than their accounts with us. Upon closer review the comparison is often not a performance problem but instead is the treatment of contributions as market gains. Whether or not the market loss is noticed, the volatility is certainly mute. Volatility can be ridden out by the accumulator and even provide buying opportunities. Dollar Cost averaging is achieved by the accumulator regularly making contributions through bull and bear markets. When prices fall, the investor’s new dollars buy more shares and that should be good news by the time one retires.
After retirement, when dollars are withdrawn rather than contributed, market downturns can be more harmful. Evidence of that can be found in many portfolios of investors who retired in 1998-2000, the peak years before the mega-bear market that bottomed in 2009. Many of these investors have smaller nest eggs than when they retired. The math here works just the opposite of dollar cost averaging because the same withdrawals in a lower market cost you more in the future. If an investor needed to withdraw $100,000 at the bottom of the 2009 market, by now the nest egg could be $250,000 greater in value. This is a primary reason to consider reducing your withdrawals during down markets, especially if you are taking more than 5 or 6% out annually and a portion of this is discretionary.
This math also has a lot to do with how we invest during retirement. The key is to seek equity strategies that are more resilient in down periods. We believe that this can best be accomplished by emphasis on more dividend oriented mutual funds or stocks. We also have implemented in our own stock selection systems more rapid selling when markets show weakness. We learned many lessons in the 2000-2002 bear market that helped us reduce losses in the 2007-2009 bear.
For this reason, in this current volatility, you might notice more selling than usual. Again, for the accumulator, these markets provide opportunities, but for retired dollars it is best to take money off the table until the markets find an upward direction. We normally recommend a 20% gap between one’s maximum and minimum exposure to stocks, giving us the opportunity to make these reductions.
Most market strategists expect this current correction to work itself out and finish 2016 in positive territory. As we go through this drama, know that we understand the math calling us to be active in minimizing the effect of downward markets. Also understand that the markets historically can become volatile and that most corrections do not last too long. We believe that will be the case this time, but for now, investors can help their own cause by minimizing their withdrawals. Together then we can work for a happy 2016.
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