Retirement advice often focuses on the long haul for the people who have decades to save. Have a smart strategy and follow through with it, conventional wisdom tells us, and even the bumpiest roads will generally tend to smooth over time.
But this solution may be easier said than done.
Firstly, retirement calculators generally assume a smooth path of returns stretching years into the future, but they may not account for the bumps along the way. The long term is made up of "short terms," and investors need to be able to successfully navigate the pain of difficult markets in order to potentially gain the benefit of compounding growth.
Second, while working-age investors have the benefit of intrinsically benefitting from drawdowns (they can put their paychecks into the market at lower levels), the math is different as investors near retirement. If a bear market strikes just as you're preparing to retire, it can cause permanent damage.
So what should you do if you don't have the typical runway to help make your nest egg stable, or if your retirement lines up with a down market?
Understand potential risks
Rather than seeking to fully avoid potential risks—which can hurt retirement success by curbing returns—investors should focus on seeking to build resilience against the unexpected. Planning ahead won't necessarily help you avoid unexpected turns in the market, but it can get you focused on keeping a calm head during rough times.
One of the biggest risks retirees can face is called sequence risk—which is when a portfolio has a significant loss in value early in retirement, with this loss negatively impacting the portfolio's sustainability over the long term.
As Justin Waring, Investment Strategist Americas for UBS, explains, "If you have a lot of losses and then you have to sell your portfolio—that cash is gone, that part of your portfolio isn't able to rebound with the market."
Waring also notes that sequence risk is something to pay more attention to as you get closer to retirement: "It's less important earlier in your life, but that calculus changes when you are near retirement or in retirement because now you don't necessarily have the time to wait for the market to rebound."
There are a few things you can do to help reduce sequence risk. That includes having a portion of your investment be conservative, not overspending and reviewing your portfolio during favorable market conditions. It's also important to have a Liquidity Strategy to help ensure you have the money you need for expenses you're expecting both today and in the next 2-5 years.
Have a Liquidity strategy in place
If you're facing retirement in a bear market, a Liquidity strategy is important because it can help you ensure you have enough cash available to cover basic daily expenses—which can be a factor in helping reduce stress during uncertain times.
"Having a Liquidity Strategy opens up options that are not having to sell parts of your portfolio to meet day-to-day cash flow needs," Waring says. That's important for everyone, but it's even more crucial when you don't have income from a job or decades of time to make up for any potential sell-offs.
"A Liquidity Strategy helps you invest like you're younger," Waring says. "It gives you a buffer against needing to sell, and it might give you the space you need to take a bit more risk in your longer-term assets, when the market is down, to potentially boost returns."
Judge performance on a multi-year horizon
In a bear market, it's always tempting to check the value of your investments constantly. But, as Michael Crook, Head Americas Investment Strategy for UBS, notes, looking beyond what's happening today and evaluating performances over three- and five- year time frames can help ease anxiety. When you take that approach, you'll have a fuller picture of your portfolio's longer-term performance, which may reduce the impulse to make any hasty changes based on the shorter-term fluctuations of the market.
Keep in mind, even if you don't have the luxury of looking at performances on a long horizon, using a perspective of a year or two at a time can help you stay focused and avoid getting wrapped up in day-to-day volatility.
Focus on what you can control
Aiming for resilience in your financial plan can help you manage factors outside of your control. By taking commonsense steps proactively, you have a lot more options and flexibility than trying to be reactive.
For one, you can learn more about what to expect during the next bear market. You can also get a better handle on your overall preparedness for retirement, map out a budget for your retirement, pay down existing debt, and maximize your Social Security benefits.
As the joke goes, "we're not expecting any surprises." There are always risks, and some can't be predicted, but investors can still plan for them. Speak with your UBS Financial Advisor to help you sustain your long-term plans.
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