Saving for retirement is important, but it’s also crucial to stay informed! Now that it’s Financial Literacy Month, we thought it would be the perfect time to discuss some things you need to know.
There’s an old saying that goes something like, “What you don’t know can’t hurt you.” You might have even used it, maybe when you came home past curfew without your parents finding out or poured your juice into the plant when no one was watching. And sure, no one being the wiser might have worked when you were young, but in retirement, what you don’t know actually CAN hurt you.
It’s important to stay informed about not just past trends, but also what you should expect as you make your way through that exciting phase of your life. It can give you a better chance to prepare for obstacles and implement a plan to overcome them. It can also help you take advantage of opportunities, especially as you look to make your money last for a quarter of a century or longer. Let’s go over five things you need to know about retirement.
- Market Downturns WILL Happen [1,2]
When you spend between 25 and 30 years or longer in retirement, it’s not a question of “if” you’ll encounter market downturn; it’s a question of “when.” These declines are typically referred to as “bear markets,” which are defined as market drops of 20% or more. If we use the S&P 500 as an indicator of bear markets, there have been 12 instances of significant market decline since the index’s inception in 1957. That means you should expect to face some adversity in the market once every five or six years. So, what are your options?
Well, historically, patience has been the best way to overcome market adversity, as long-term outlooks have always trended upward. It can also be helpful to work with a financial professional who can tailor your portfolio to your goals and tolerance for risk. If you’re more comfortable with risk or have a longer timeline to retirement, you may have more assets invested in the market, whereas those approaching retirement are usually advised to shift more of the portfolio into assets that are fixed, like bonds or bond alternatives.
Rebalancing your portfolio and creating a customized retirement plan as you approach retirement is advised, especially to mitigate sequence of returns risk. Sequence of returns risk is the risk of retirees facing market downturn in the few years prior or the first few years of retirement, meaning they take greater losses on greater asset totals. Again, working with a financial professional to find ways to mitigate sequence of returns risk can be helpful. Sometimes this is done by creating a stream of income with part of your retirement assets to cover your living expenses. This allows you to wait out bear markets with your remaining assets which might remain directly invested in the market.
- Decumulation is Just as Important as Accumulation
Yes, we all want to retire as multimillionaires, hitting on our investments and getting lucrative returns. That period of building your assets, investment and making growth-oriented decisions is often referred to as the “accumulation” phase. However, the fact is, it doesn’t matter how much money you accumulate if you don’t have a plan for how to spend it in the “decumulation” phase, after you retire and no longer have employment income coming in. Oftentimes, that plan includes a strategy to create income for your projected lifestyle, as well as a comprehensive budget dictating where that income will go. Additionally, many factors will play a role in decumulation, including taxation, legislation, your life expectancy, your spending habits and more.
We traditionally recommend getting a good idea of how much you plan to spend on an annual basis. That’s how much income you’ll likely need to create, along with a little bit of wiggle room giving you the freedom to cover emergencies or other unexpected expenses. The best way to do this is often by assessing your goals for retirement, then estimating the amount of money you’ll need to achieve them. Then, we can build a budget for you to strictly adhere to in retirement. It’s important to understand that if you start planning for retirement once you’re already there, it might be too late. If you’ve become accustomed to your lifestyle, it can be difficult to make cuts, especially when some retirees actually need more money in retirement than they did while they were working, leading us to our next point.
If you have any questions about how you can properly plan for retirement, please contact Dale Kelly at PCIA Mid-South by calling (901) 244-5099.
Sources:
- https://www.forbes.com/advisor/investing/bear-market-history/
- https://www.investopedia.com/8-ways-to-survive-a-market-downturn-4773417
- https://www.wsj.com/buyside/personal-finance/how-much-do-i-need-to-retire-f3275fa7
- https://www.nerdwallet.com/article/investing/the-average-retirement-savings-by-age-and-why-you-need-more
- https://www.cnbc.com/2023/09/08/56percent-of-americans-say-theyre-not-on-track-to-comfortably-retire.html
- https://www.cbpp.org/research/social-security/key-principles-for-strengthening-social-security
- https://www.cnbc.com/select/will-social-security-run-out-heres-what-you-need-to-know/
- https://www.ssa.gov/oact/population/longevity.html
- https://www.aplaceformom.com/senior-living-data/articles/long-term-care-statistics
- https://www.genworth.com/aging-and-you/finances/cost-of-care
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