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08.14.20

Approaching Retirement? How to Deal With Market Volatility
Christopher Georgiou

The COVID-19 pandemic has wreaked havoc on financial markets and the general economy, providing swings in both directions. If you are approaching retirement, or are already retired, you may be worried about the effects of market volatility on your retirement portfolio. Here is how to adjust your investments — and possibly, some of your expectations.

Asset allocation review

For longer-term goals, many investors put their money in stocks, which tend to generate higher returns over ten or 20 years, but are more vulnerable to short-term market fluctuations. As your time horizon shortens, it is generally advisable to shift asset allocations toward less volatile vehicles, such as bonds and cash investments.

Thus, it is important to review your asset allocation periodically. You will want to ensure that your portfolio remains aligned with your circumstances. Also, the balance of assets in your portfolio tends to change over time depending on the relative performance of different types of investments. Suppose, for example, that your target allocation is 60% stocks and 40% bonds and cash. After a period of strong stock market growth, you may find that the allocation has shifted to 70% stocks and 30% bonds and cash.

If your asset allocation no longer reflects your investment strategy, consider rebalancing your portfolio. But approach rebalancing with caution: If it would require you to sell investments that have declined in value (as many have in 2020), realizing those losses will deprive you of the opportunity to participate in future returns. Asset allocation and rebalancing do not guarantee a profit or ensure against losses. Furthermore, there could be planning opportunities between adjusting assets that are in taxable accounts versus assets in retirement accounts.

Managing multiple time horizons

Younger people typically view their time horizon as a single point in time: Their expected retirement date. But as you enter retirement, it becomes necessary to manage several time horizons at once. Depending on your age, retirement could last 30 years or more. This means your investments need to fund a combination of short-term, intermediate-term and long-term goals.

Shortly before reaching retirement, consider allocating a certain percentage of holdings to cash and short-term bonds. This can help ensure that you have money to pay for living expenses over the next couple of years, even if the market is volatile, helping you avoid selling assets out of necessity. For intermediate-term goals, it usually makes sense to keep a mix of cash, bonds and stocks to strike an appropriate balance between risk and potential rewards. For long-term retirement goals, more aggressive investments may be appropriate.

If you are not ready

What if you are nearing or entering retirement during a market downturn and you have not laid a financial foundation to support your retirement needs? You will need to take quick action but do not panic. Start by reviewing your emergency funds or other income resources to see if you can meet short-term needs without selling assets at depressed prices. If you have sufficient resources, you might want to buy stock or other volatile investments at lower prices to help build long-term funds.

Protect the nest

As you approach retirement during a period of market volatility, it is critical to protect your nest egg. How you do this depends on your personal situation. Be sure to consult with advisors to design a plan that makes sense for you.

Sidebar: CARES Act provides retirement relief

The Coronavirus Aid, Relief, and Economic Security (CARES) Act enacted in March contains several provisions affecting retirement plans. One provision was designed to ease the impact of market volatility on tax-advantaged retirement accounts: It allows you to skip required minimum distributions (RMDs) from qualified retirement plans and IRAs for 2020, which could be beneficial for those who simply do not need the funds. This is important because 2020 RMDs are calculated based on account values as of December 31, 2019.

Say, for example, that your account’s value has declined substantially since the end of 2019. Taking an RMD in 2020 could deplete a larger percentage of your current balance than would normally be required and force you to sell assets at depressed values rather than leaving investments in place to potentially regain their value. Plus, you would generally have to pay tax on the distribution.

Another provision of the CARES Act can waive the early withdrawal penalty tax that normally applies to taxpayers under age 59½ if the taxpayer qualifies. It is available for 2020 distributions up to $100,000 for taxpayers who suffer financial hardship as a direct result of the COVID-19 pandemic. This relief may be available if you, a spouse or dependent was diagnosed with COVID-19 or if you otherwise suffered certain adverse financial consequences from it. You may also avoid paying tax on qualifying distributions by recontributing the amount within three years (without regard to otherwise applicable contribution limits). Amounts that are not recontributed are taxable, but you can spread the tax liability over a three-year period.

Finally, the Act allows retirement plans to increase maximum loan amounts in 2020 to the lesser of $100,000 or 100% of the vested account balance. Ordinarily, loans are limited to the lesser of $50,000 or 50% of the vested balance.

For more information, contact Chris Georgiou at cgeorgiou@orba.com or 312.670.7444. Visit ORBA.com to learn more about our Wealth Management Services.

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