As markets go haywire, remember your retirement plan goals
Major U.S. market indexes are experiencing some of their worst losses in recent years. With each passing tick of the Dow and each frightening headline, the temptation rises for retirement savers to make emotional decisions based on short-term market movements.
There’s no question that we are living in interesting times. A litany of factors is in play, including the world oil glut, volatility in Chinese markets, debt issues in Greece and speculation surrounding Federal Reserve action on interest rates. It’s anyone’s guess as to which news event will surface next and what impact it will have on markets.
Despite all the prognostication in the financial press, nobody can tell you with any degree of certainty what’s going to happen next. Considering all of the factors that influence the global economy, it’s probably easier to predict the weather than the movements in the markets.
That said, there were some very cogent and thoughtful pieces that appeared over the weekend. For example, Jason Zweig of The Wall Street Journal offered an excellent perspective on the five things investors should not do now1, such as panic, be complacent or get hung up on headlines. Robert Powell at USA Today provides an excellent point of view2 about using these times to test one’s portfolio allocation and risk appetite. In addition, Andrew Bary at Barron’s offered an interesting take3 that puts last week’s market action in context.
From a retirement planning perspective, Empower Retirement offers some additional points to assuage any concerns on the part of our participants.
Keep your retirement income goals in mind
The purpose of a retirement plan is to replace income in retirement. If you’re still thinking about your retirement plan in terms of accumulated assets you might be more likely to have a negative reaction to market declines. It would be understandably frightening to see, for example, a 5 or 10% drop in your balance. You might even be tempted to take action and assume that by doing so you’ll reduce losses.
However, if you’re thinking about your retirement plan in terms of the monthly income you’ll receive in retirement, then market corrections are going to seem less impactful. The effect of even a large market move on your monthly paycheck in retirement is going to seem insignificant if you’re planning for the long term. If one develops that monthly retirement income mentality it’s a great way to diminish any fears and will help prevent making emotional investing decisions.
Develop a plan to help guide you through turbulent markets
Hopefully, you’ve got an advisor with whom you’ve developed a retirement plan that’s aligned with your goals. If you don’t, research from the Lifetime Income Score V4 shows that the value of advice is significant. It’s critical that in times of market volatility you stick with that plan and don’t let unexpected market turns force you off the path unnecessarily.
With a high degree of certainty, I can say that you and your advisor did not develop a plan that required you to panic when the markets become volatile. Your plan does not instruct you to react with emotion when markets decline. Stick to your guns and stay the course. Your advisor knows how to build a retirement plan and you ought to have confidence in it.
Market timing does not pay
Part of the reason you should be in an advisor relationship is to help keep you in the market at the right time and in the right investment vehicles to help keep your savings working for you. It’s certainly tempting to think that by exiting the market you’ll avoid losses and be able to re-enter the market at the right time. There is a lot of research5 that’s been done to show that attempts to time the market are very difficult to successfully execute.
Check in with your advisor
If you have concerns, now is a good time to talk to your advisor. See what he or she is thinking about the current market environment, ask questions and discuss whatever concerns you may have. The conversation alone may provide assurances you need. If the current market environment is exposing flaws in your strategy or revealing that you may not have the risk tolerance you originally thought you had then, by all means, work with your advisor to make a change. But more often than not, your next step is to do nothing, stay the course and keep on saving toward your goals.