(Forbes) - Imagine retiring in this market. A 60-year-old who owns a balanced fund—60% allocated to stocks, 40% to bonds—has seen the value of their investment drop by 18% so far this year.
Soaring prices only makes matters worse. Not only does our 60-year-old have less wealth, but also their savings don’t buy what they used to. In fact, financial advisors say their clients have been more preoccupied with gas and food prices than the terrible stock market.
“Inflation is the biggest issue I’ve been hearing about lately,” said Ashlee Walton, senior financial planner at James Investment Research Inc. “Clients don’t have a lot of experience dealing with inflation this high, and they’re worried about it being a longer-term scenario.”
Make no mistake, inflation is the main culprit for the dismal stock market performance in 2022 so far. The Federal Reserve is hiking interest rates to quash price growth, taking cheap money away from stocks and tech companies, and it’s also causing pain and suffering in the bond market.
For nearly everyone, 2022 has been almost as bad as 2008. Here are strategies for retirees and near-retirees to stay on track in a bear market.
Test Drive Your Retirement Budget
For many people, life in retirement may be pretty different than what they’d imagined. Just a quarter of respondents in a recent Employee Benefit Research Institute (EBRI) survey said that their day-to-day experience aligned with what they had expected before retiring.
One of the biggest adjustments is getting by on a fixed income. That’s why Catherine Collinson, chief executive of the Transamerica Center for Retirement Studies, recommends that investors should take a “retirement test drive” before they actually hang up their spurs.
“Find out how easy or difficult it is to stay on budget,” Collinson said. This will make it easier to adjust spending in times of high inflation and economic trouble.
Let’s say your annual household income is $100,000, and your current retirement plan would deliver 80% of your pre-retirement income. Spend a period of time attempting to get by on your anticipated income, rather than what you currently earn.
The transition won’t be easy, but that’s the point of the exercise. Adopting a fixed income requires a psychological shift in intuitively understanding what you can really afford. It’s best to approximate this new lifestyle before playing with live ammo.
Stick To Your Financial Plan
Folks often call their financial advisor when markets get rocky and economic news sounds bad, driven by the urge to do something to fix the short-term unpleasantness. It’s understandable, but this urge is misplaced.
People with a good handle on their long-term finances generally have a written financial plan. A recent Hearts & Wallets survey found that people who wrote out a financial plan had more money, better diversification and a higher degree of confidence in their retirement.
Walton suggests retirees go back and review their financial plan when markets start looking bad. This can help them appreciate the larger arc of their post-working life.
“Otherwise you don’t know what you should be comparing,” said Walton.
Meanwhile, the absence of a plan can be mostly keenly felt in trying times. Rather than having a bedrock to fall back on, you might try to buy or sell your way out of a bad year for your portfolio, which only creates worse problems down the road.
If you don’t already have a financial plan or a retirement plan, now is the time to contact a fee-only financial planner and get to work.
Build a Cash Reserve
You can weather bear markets and investing missteps, like selling when stocks are down, early in your career. That’s because you’ve got plenty of time to course correct.
Once retirement is close at hand, you have no such luxury.
“Retirees don’t have the time to wait for the market to bounce back,” said Jesse Piburn, director of advisory service with Personal Capital. “If they take withdrawals from their retirement funds in a down market, they’ll have fewer assets to grow when the market does recover.”
A key part of retirement planning is to provide yourself with a sizable cash cushion so you don’t have to sell stocks when they’re down to finance your expenses. Part of your retirement plan should be funding a cash bucket that you can use to augment guaranteed income from sources like Social Security, pensions and annuities.
“Outside of your retirement portfolio, consider aiming to have six-to-12 months worth of liquid cash or cash alternatives, so you can withdraw from those if needed without touching your portfolio,” said Piburn.
Optimize Your Tax Strategy
If you have to sell something, be strategic about which account you use.
Selling from a taxable brokerage account may make sense if you’re able to take a capital loss, which will lower your tax bill from other sources of income.
Even if you’re selling a winner, long-term capital gains tax rates may be less than your marginal tax bracket, which is what you’d pay if you took distributions from an IRA.
“It’s not just what you’re selling, but where you’re selling from,” said Walton.
Now might also be the time to consider a Roth IRA conversion. You might be able to pay less in taxes (since gains are generally down across the board), and enjoy tax-free growth once the market rebounds.
But only do so if a Roth conversion makes sense in the first place, i.e. you have enough in cash to pay what taxes you’ll owe and you expect your tax rates to be higher in the future.
Get a Part-Time Job
One of the best ways to ease your financial crunch is to take on a part-time job to add income.
While a looming recession may dent your optimism, this particular downturn will not be as hard on the labor market as recent ones. For instance, while the Federal Reserve expects the unemployment rate to increase next year to 4.4%, that’s very low by historical standards. The unemployment rate in September 2009 was 9.8%.
Earning a bit of cash while you’re ostensibly retired, while something of a cheat, has a few benefits.
The first is obvious: By earning income, you’re taking stress off your portfolio, and reducing your need to withdraw into a bad market. A paycheck not only helps your finances now, but improves your long-term prospects, especially if you’re able to delay collecting Social Security until at least your full retirement age.
Reentering the workforce may seem impossible, but it’s much more manageable than you’d imagine. You’re an experienced, dependable worker who isn’t looking for the fringe benefits that come with full-time employees.
Moreover, a consistent gig that doesn’t occupy too much of your time will help give structure to a new phase of your life, which has suddenly been upended by sky-high inflation, a terrible market and European war.
At the very least, it’ll give you something different to think about.
By Taylor Tepper
Editor Benjamin Curry
