Managing Retirement Accounts in Uncertain Times
COVID-19 has upended our way of life. In addition to the enormous toll it has taken on people's lives and health, it affects those planning for retirement as well. Following are some tips on how to manage your retirement plans in the wake of this market turmoil.
Everybody Should Do This
Use this as a wakeup call. For a decade stocks have primarily increased in value. In a bull market investing is easy. Just sit back and watch your account go up! After seeing the market triple in ten years, few people gave thought as to risk tolerance or what an appropriate asset allocation should be. Until last month when we experienced one of the quickest bear markets in history. Looking back, how did you feel? How did you react? Did you make any changes? Last month should be a wakeup call as to what an appropriate investment strategy should be for your stage of life.
Don't check your account balances daily. When the market was rising did you log in to your 401(k) account every day to see how you were doing? Probably not. But when the market plummets, the first thought is to look at our account values daily to see how much we've lost. It's not the most constructive action. It adds fear and anxiety into an already stressful time in our lives. It may lead us to make emotional investment decisions. Commit to only looking at your investments on a predetermined schedule. Have a monthly check in with your investment accounts but no more.
Don't try to time the market. Nobody can time the markets successfully. If we could time the markets, we all would have sold our stocks in February when the market peaked. But we didn't. However, when the market falls 30% too many people sell their stocks because they know that the stock market is going lower. And what happens? The stock market rallies 20% and they miss out on that. I'll repeat it. Nobody can time the markets. If you are making a trade because you have a feeling about what is coming ignore that. Plan for the long-term.
Consolidate your retirement accounts. You likely have a 401(k) at work. Do you have one at your old employer too? How about an IRA or two? Are you managing them as one household portfolio? How can you know how much exposure you have to the stock market if you have accounts all over the place? The best option would be to consolidate as much as you can into an IRA so you can see in one place how your investments are allocated. When you do go to place a trade, it will be cheaper and more efficient to only do it in one account instead of many.
People Retiring Soon Should Do This
Gradually rebalance. When the market was going up, rebalancing was probably on your to do list. Did you do it? Now your 401(k) has lost a quarter of its value. What to do? It's time to come up with a well thought out strategy to reduce your risk. You need to rebalance your account to get to an appropriate asset allocation. But you shouldn't do it all at once because then you lock in the losses you just experienced. Determine what an appropriate allocation is for you. Then come up with a plan for the next year in which every month you will move a portion of your investments from riskier assets to safer assets. That way if the market rises you can recoup some of your losses on the way up. But if it falls you took steps to lessen the impact. You can view our post on retirees preparing for bear markets here.
Save more. At this point you need to right size your income statement. That may involve reducing expenses. Travel plans? Probably a good year to have a staycation. Do you have a stimulus check headed your way? Consider investing it outside of the 401(k).
Delay retirement. Nobody knows how the COVID-19 plays out. If you have a good, stable income it may be prudent to consider delaying retirement six months to a year to avoid having to sell your investments while the market is low.
Consider collecting Social Security earlier. Do you want to retire now but don't want to sell your investments? Consider filing for Social Security upon retirement rather than waiting for a higher benefit down the road. Having a recurring check deposited every month will alleviate the need to live solely off of your investments.
Hire professional help. The easiest way to avoid the stress and worry of managing your retirement account is by delegating it to someone else. Hiring a great financial planner will offer benefits beyond investment advice. Financial advisors can help decide when to collect Social Security, create IRA distribution strategies, minimize taxes, and more.
People Retiring in 5 - 10 Years Should Do This
Contribute more to your 401(k). Stocks are on sale from a month ago. For a longer-term investor, it would make sense to invest at lower prices. That's not saying markets can't fall another 15% from here. But over the long-term most investors would do well by increasing their savings rate now.
Have a plan to rebalance. This sell-off is a wakeup call as to how much risk feels right to you. If this decline felt uncomfortable now, it really will hurt when you are a year out from retirement. Determine an appropriate asset allocation. Come up with a plan to get there over time. Take a look at Target Date funds in your retirement plan that will handle the rebalancing for you. Consider putting all new contributions there and then gradually rebalance out of your existing holdings.
Pay down debt. One of the best ways to survive market declines in retirement is to have a reasonable lifestyle. If you can be debt free by retirement, it will be easier for your portfolio to cover your living expenses. More people now are using the increased standard deduction, so the deduction of mortgage interest doesn't come into play for a lot of families. This makes it more appealing to pay off your mortgage and become debt free.
For more steps be sure to check out our article on cushioning stock market sell-offs here.
People Retiring in 10 + Years Should Do This
Switch to a Roth 401(k). Tax rates are at multi-decade lows right now. With the huge stimulus packages being created, the odds are that tax rates will have to rise over time to fund our deficit. A traditional 401(k) gives you a tax deduction now (when rates are low) and has you pay taxes on withdrawal (when rates could be higher). By switching to a Roth 401(k) you don't get a tax deduction now, but when you withdraw the money everything will come out tax free. If you can get your 401(k) to a million dollars by retirement you would have a tax-free million-dollar asset at your disposal.
Work with a South Dakota Financial Advisor
This should not be construed as personalized advice. No advice is complete without knowing your individual circumstances. These are guidelines to use as you pursue your own personalized financial plan. You may review our disclaimers here.
Consider working with a Fee-Only advisor. Do you ever wonder if your financial advisor is recommending something that will benefit them more than you? A Fee-Only financial advisor is only compensated by their clients. No commissions. No hidden fees. No sales pressure.
Consider working with a Fiduciary advisor. Did you know that not all advisors are legally bound to act in your best interest? A fiduciary advisor is. When it comes to planning your financial future, it makes sense to partner with one who has your best interest at heart.
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Brian Berkenhoff, CFA is a financial advisor in Brookings, South Dakota. Birch Investment Management serves clients locally and virtually nationwide.
High earning professionals hire us as a trusted partner to simplify their financial lives.
Retirees hire us to plan their retirement income stream and minimize their taxes.
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