MONEY matters

Mark Zaifman's thoughts on money, global economic trends and politics

How to Handle Stock Market Volatility When Planning For Retirement

Mark Zaifman   |    Mon, Aug 22, 2011 @ 04:12 PM
how to handle stock market volatility

If you’re the type of investor that thrives on volatility in the stock market, this is your kind of summer. With the advent of high frequency trading, multiple hedge funds using Wall Street as one big casino, the global sovereign debt crisis, etc, market volatility for at least the short-term is here to stay.

But if you’re a baby boomer nearing retirement, this is a summer you’d rather forget. That’s because after the recent market crash of 2008-2009, and the market recovery that came afterwards, most boomers that invested in the stock market watched as their investments came back up in value quite nicely - only to see a portion of their gains evaporate on paper yet again.

Déjà vu all Over Again

Memories of the 08-09 crash are still fresh in most investor’s minds. If you’re tempted to bail on stocks, check out this article on the lessons learned from 2008 financial data: Retirement Investors' Portfolios-2008-2009 Analysis.  Here are key findings from the article:

  • Participants who changed their equity allocations to zero percent between Oct. 1, 2008, and Mar. 31, 2009 and stayed out of stocks through June 30th this year saw an average increase in account balance of only 2%.
  • Participants who exited stocks but then returned to some level of equity allocation after that market decline saw average account balance increases of 25%.
  • Investors who stuck it out with a continuous asset allocation strategy that included stocks had an average account balance increase of 50%.

Planning Your Retirement Income Strategy - Time for a Second Opinion?

When the stock market is rising every year and the value of your home is increasing annually, (remember those good old days?) planning for your retirement seems relatively easy. During those boom times, even the most cautious investor can get caught up in the euphoria of the moment, become overly optimistic, and overestimate future investment returns. Similarly, when the markets are tanking, you can become overly pessimistic and underestimate future returns. Both results can cause serious damage to your hopes and dreams for the hard earned retirement you desire.

As a proud do-it-yourselfer and someone that’s also frugal, I understand the urge to attempt retirement planning on your own. There are many websites that focus on retirement planning for the DIY crowd, lots of retirement calculators and loads of books on retirement, early retirement and semi-retirement. That’s all good, but if you’re getting close to retirement, are a DIY type and have been managing your investments yourself, I highly suggest you consider the value of a second opinion sooner rather than later.

The best thing that can happen to you is to discover that your retirement plan is bullet proof, that even in the worst case scenario you’re still good to go. In that case, the peace of mind you’ll receive from this second opinion will be worth its weight in gold. Not to mention the countless nights ahead when you’ll be sleeping like a baby. And if that’s not enough encouragement to seek a second opinion, think how smart you’ll feel when you discover all the work and financial planning you did on your own has paid off big time.

Course Correction for a Successful Transition to Retirement

On the other hand, if you discover that the dreams you have for retirement are just that, dreams, and not reality, you’ll want to take action sooner rather than later. Getting a second opinion is the first step in assessing and ultimately course correcting for a successful transition to retirement.

We all know that when lost, men will keep driving and driving, never stopping to ask for directions, only to discover 20 miles later they have been heading in the wrong direction and need to turn around.  A woman’s first instinct is to ask for directions as soon as they are lost. I see this scenario playing out in my financial planning practice over and over when it comes to retirement planning.

Since there are no do-over’s when it comes to retirement, one of the most common fears people have is that they will run out of money. Check out my blog Do You Have the Running Out of Money in Retirement Nightmare? It’s usually this reoccurring nightmare that motivates people to seek a second opinion.

Making it a Soft Landing into Retirement

Here’s the bottom line. Transitioning from working and accumulating money to retiring and withdrawing money is a big deal, make no mistake about it. Flying blind into retirement with outdated or faulty assumptions is how you crash land into retirement. Having a dynamic retirement plan that strategically and tactically lays out how you get from point A to point B is how you make the transition to retirement a successful one.

retirement planning

'Sleep Like a Baby' photo by Peasap