Q. I am planning my retirement, how do I ensure my portfolio could sustain market volatility?
A. It's important to understand that volatility is a fact of life, and there will be market events and recessions - sometimes at inconvenient times.
What should you do? Try the following 4 steps:
1. Develop a Solid Foundation
For baby boomers nearing retirement - and for most investors, it’s important to start by understanding your basic financial needs during retirement. Based on a recent MassMutual Retirement Savings Risk Study, while 80% of pre-retirees think they’ll have lower retirement costs, only 50% of those in retirement now actually spend less than they did before.Once you’ve developed that understanding, look at the different aspects of your retirement income and figure out how much of what you need for necessities can be covered by your monthly Social Security benefits and pension if you have it.
2. Create a 5-year Bond Ladder
Once the necessities are planned for, you could create a bond ladder to last five years. A bond ladder will arrange for investments that mature at different times while providing you with interest income. You should be able to create a situation where you can receive regular income and then, as bonds mature, you can use the principal to cover current-year expenses.
A five-year bond ladder can help with discretionary income that goes beyond the bare necessities. After the bond ladder is in place, you can keep a portion of your retirement portfolio in the stock market, and pursue growth for later.
3. Convert Part of Portfolio to Roth IRA
In general, you don’t want to sell off a lot when the market is down, however, a downturn might be a good time to consider converting part of your portfolio using a Roth conversion.
You have to pay taxes when you convert to a Roth IRA, but if you do so when the value of your portfolio is lower, depending on your tax bracket now versus later, you may reduce the tax impact. Once you’ve converted to a Roth account, you won’t have to worry about paying taxes on your distributions in retirement (once the conversion has aged five years). If or when the market recovers after a period of volatility, you can take advantage of the gains - without paying the higher taxes.
Plus, your Roth IRA doesn’t come with required minimum distributions (RMDs) at age 70 1/2 (as opposed to traditional IRAs), and Roth tax-free distributions won’t increase your Medicare premiums.
4. Conduct a Stress Test
Before you move forward with any retirement portfolio changes ahead of expected market volatility, you should conduct a stress test to test different scenarios to better understand the potential impact of losses in the first few years of retirement. When you know what you’re up against, you might be able to make a few tweaks to your portfolio or prepare ahead of time by doing a little rebalancing.
A. It's important to understand that volatility is a fact of life, and there will be market events and recessions - sometimes at inconvenient times.
What should you do? Try the following 4 steps:
1. Develop a Solid Foundation
For baby boomers nearing retirement - and for most investors, it’s important to start by understanding your basic financial needs during retirement. Based on a recent MassMutual Retirement Savings Risk Study, while 80% of pre-retirees think they’ll have lower retirement costs, only 50% of those in retirement now actually spend less than they did before.Once you’ve developed that understanding, look at the different aspects of your retirement income and figure out how much of what you need for necessities can be covered by your monthly Social Security benefits and pension if you have it.
2. Create a 5-year Bond Ladder
Once the necessities are planned for, you could create a bond ladder to last five years. A bond ladder will arrange for investments that mature at different times while providing you with interest income. You should be able to create a situation where you can receive regular income and then, as bonds mature, you can use the principal to cover current-year expenses.
A five-year bond ladder can help with discretionary income that goes beyond the bare necessities. After the bond ladder is in place, you can keep a portion of your retirement portfolio in the stock market, and pursue growth for later.
3. Convert Part of Portfolio to Roth IRA
In general, you don’t want to sell off a lot when the market is down, however, a downturn might be a good time to consider converting part of your portfolio using a Roth conversion.
You have to pay taxes when you convert to a Roth IRA, but if you do so when the value of your portfolio is lower, depending on your tax bracket now versus later, you may reduce the tax impact. Once you’ve converted to a Roth account, you won’t have to worry about paying taxes on your distributions in retirement (once the conversion has aged five years). If or when the market recovers after a period of volatility, you can take advantage of the gains - without paying the higher taxes.
Plus, your Roth IRA doesn’t come with required minimum distributions (RMDs) at age 70 1/2 (as opposed to traditional IRAs), and Roth tax-free distributions won’t increase your Medicare premiums.
4. Conduct a Stress Test
Before you move forward with any retirement portfolio changes ahead of expected market volatility, you should conduct a stress test to test different scenarios to better understand the potential impact of losses in the first few years of retirement. When you know what you’re up against, you might be able to make a few tweaks to your portfolio or prepare ahead of time by doing a little rebalancing.
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