Recent, soon-to-be retirees could suffer more from stock market losses

Here’s a brain teaser: Two people watched their investment portfolios shrink by 25% this year. One just retired at the age of 60. The other, who is 80 years old, has been enjoying retirement for some time.

Is it possible – even likely – that this year’s stock market crash will hurt younger retirees more than older retirees?

Yes it is.

The answer doesn’t seem intuitive. For example, the younger retiree may not have nearly as high medical expenses as the older one. And the younger person has more flexibility, the ability to return to work and time to make up for losses.

But the younger ones also need their money longer. And in terms of the impact on an investment portfolio, large setbacks early on can do much more lasting damage than similarly large losses many years later. This is referred to as “return-following” or “consequential” risk. Pensioners of all ages have to beware of this, but especially younger ones in crisis years like 2022.

Let’s say you’re still working and have $100,000 in a stock fund held in an individual retirement account (so you don’t have to pay taxes) and you leave it alone for five years. Say you make 10% four of those years but lose 25% in one year.

play

AP Explains: The stock market is taking a big slump

The stock market has fallen the most since June 2020 after Wall Street humbly acknowledged inflation is not slowing as much as hoped. (Sep 13)

Also Read :  Global Pentaerythritol Market Predicted to Grow at ~7% CAGR during 2022-2031; Growing Demand for Intermediate for Paints and Coatings and Rising Application in Construction and Automotive to Promote Growth

AP

Assuming you don’t touch the account, it wouldn’t matter what year you suffered that 25% drop. Either way, you would end up with the same amount of money, just under $110,000 after five years.

But in retirement, it could mean a lot if you suffer a big loss because you’re touching the account — that is, making withdrawals to cover living expenses. This leaves a small remaining account balance to build on when financial markets later recover.

Large negative investment results in the early years of retirement “can compound over time,” said Bob Witt, financial advisor at Savant Wealth Management, during a recent webinar.

There is a significant difference, Witt said, between planning investments during the accumulation or saving phase and withdrawing money during the distribution phase. Large initial losses coupled with ongoing withdrawals can severely impact an account’s value, requiring much more time to recover and increasing the risk of running out of funds prematurely, he added.

Money Messages: Social Security inflation adjustment to increase benefits by 8.7%

Damage-Magnifying Errors

Another associated risk is that newly retired investors, unsettled by a decline in their wealth, could compound the problem by fleeing to the perceived safety of cash rather than traveling back in time, making them the probable , eventual rebound in stocks and even stocks miss bond prices.

Many investors tend to underperform the markets anyway, making poorly timed buying and selling decisions. These shifts can cause more pain in the early years of retirement.

Also Read :  US markets remain under the cosh as S&P 500 closes at two year low

“A major market downturn early in retirement is among the most potentially destructive scenarios for investors,” wrote investment giant Pimco’s Rene Martel and Avi Sharon in a 2019 article on the subject.

Poor timing decisions “tend to crystallize the original loss and dig a deeper hole, making recovery more difficult or even impossible,” they added.

Younger retirees can mitigate sequence risk in a number of ways, such as relying more on interest and dividend income or withdrawals from bank and other accounts whose values ​​don’t fluctuate widely. For example, the Pimco authors suggest pre-funding some of your pre-retirement income needs with low-volatility bonds or other stable investments — and not touching your holdings in stocks or mutual funds.

Put another way, you could use more conservative assets to pay for groceries, housing, and other necessities, while tying discretionary spending for things like vacations to how well your volatile, growth-oriented investments are performing.

And of course, it’s wise to make conservative but realistic spending estimates during the early years of retirement and live within those limits.

An even more powerful way to delay retirement by a year or two can make a world of difference and allow you to minimize withdrawals from your portfolio. The employment environment remains favourable, with around 1.7 vacancies for every unemployed person. Many people of retirement age can probably find work if they want to.

Also Read :  BMO Capital Markets Upgrades Obsidian Energy (TSE:OBE) to "Market Perform"

Inflation: Inflation fell to 8.2% but remained high in September

Ride the bear market

It is also important to maintain a realistic, long-term investment perspective.

The current bear or down streak in equity markets is severe, with prices having fallen about 25% on average so far in 2022, despite the hangover of high inflation and the looming recession. Over the past 42 years, stocks in the Standard & Poor’s 500 index have posted annual losses of at least 20% on just nine occasions, reports JPMorgan Asset Management. During that span, on only two previous occasions, the market ended a full calendar year down 20% or more.

Over the past century, including the outsized declines during the Great Depression, bear markets lasted 20 months and wiped out an average of 41% of stock values. The current bear cycle is around nine to eleven months old, depending on your yardstick.

Even more unusually, both stocks and bonds have posted negative returns this year. Bond prices tend to hold up better when stocks falter. In fact, a portfolio of 50% stocks and 50% bonds has historically produced an average annual return of 9%, according to JPMorgan.

In short, like all previous declines, this bear market will end sooner or later. If you can avoid damaging withdrawals and poor investment decisions, especially early in retirement, you’ll be glad you did.

Reach the reporter at [email protected]

Support local journalism. Subscribe to azcentral.com today.

Source

Leave a Reply

Your email address will not be published.