What Baby Boomers Can Do When Volatility Hits Near Retirement

Baby boomers will soon start to enter retirement, and with life expectancy extending, there will be many volatile factors to consider for your own retirement.

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Key Takeaways

  • Divide your portfolio into different spending categories 
  • Conduct a stress test on your retirement portfolio
  • Don’t necessarily move everything out of stocks

In 2011, the first of the baby boomers reached retirement age. And according to the Social Security Administration, about 10,000 Americans turn 65 each day. That’s a lot of baby boomer retirement, as well as a lot of concern among retiring boomers about the impact of volatility on their retirement portfolios. None of us wants to outlive our money.

When Volatility Looms

It’s tempting to sell all your stocks when volatility rears its ugly head. However, one of the key concepts of investing is understanding that volatility is a fact of life, and that there will be market events and recessions—sometimes at inconvenient times.

“You have to plan for volatility, even if your portfolio isn’t experiencing it now,” said Christine Russell, senior manager of retirement and annuities at TD Ameritrade. “As you approach retirement, you have to assume that your retirement portfolio could be at risk.”

But planning for volatility doesn’t mean admitting defeat. In fact, by planning ahead, it’s possible for your portfolio to survive market turmoil while still allowing you to pursue your financial needs during retirement.

Start with Your Foundation

For baby boomers nearing retirement—and for most investors, really—Russell said it’s important to start by understanding your basic financial needs during retirement. Look ahead. A recent MassMutual Retirement Savings Risk Study pointed out that 80% of pre-retirees think they’ll have lower retirement costs. If you’re in the pre-retirement stage, though, there’s a good chance you’re underestimating what you need. That same study found that only 50% of those in retirement now actually spend less than they did before.

“Be realistic about your predicted core expenses,” said Russell. “How much will your housing cost? What are your basic food expenses? Figure out your basic requirements for life.”

Once you’ve done that, look at the different aspects of your retirement income. Figure out how much of what you need for necessities can be covered by your monthly Social Security benefits. Do you have any pensions? Russell even said to consider certain types of investments that offer monthly income after you retire“Your foundational expense needs should be covered by income sources that are fairly reliable—many retirees look especially for lifetime income sources,” said Russell. 

Consider Creating a Bond Ladder

Once the necessities are planned for, many retirees consider creating a bond ladder designed to last five years. The idea behind a bond ladder is to 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,” said Russell. “Many retirees may still keep a portion of their retirement portfolio in the stock market, and pursue growth for later. The idea is to plan for immediate income for the next five years.”

In a Trough? Consider a Roth IRA Conversion

Depending on your situation, Russell explained, it might actually make sense to convert a portion of your portfolio to a Roth IRA during a trough.

“In general, you don’t want to sell off a lot when the market is down,” Russell pointed out. “However, this might be a 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. Consulting with a specialist can help you explore the choices and figure out if a Roth conversion makes sense as part of your retirement planning.

Conduct a Retirement Portfolio Stress Test

Before you move forward with any retirement portfolio changes ahead of expected market volatility, Russell recommended conducting a stress test.

“So many people assume that they’ll gain 5% or 10% a year in their portfolios,” said Russell. “But what if you lose that much in the first couple years of your retirement?”

Russell suggested using a retirement income calculator 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.

In addition to running your own stress tests, though, you can also call or visit a TD Ameritrade branch. Whether you’re a baby boomer nearing retirement or an investor at any other point in your retirement journey, a financial consultant can help you figure out what you should consider doing now—ahead of any market volatility that might affect your retirement portfolio—so that you can reposition as needed.

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Key Takeaways

  • Divide your portfolio into different spending categories 
  • Conduct a stress test on your retirement portfolio
  • Don’t necessarily move everything out of stocks
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