Brad Rhodes: Market volatility can be stressful – Salisbury Post

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You’ve worked hard your whole life, played by the rules, only to have most of your nest egg wiped out because of something you could never control. For most of us, this would be devastating and potentially life changing.

For most pre-retirees and retirees, the number one concern is the fear of running out of money in retirement! What options do we have as we wonder if Social Security will be here and the days of pensions are over?

There are three common methods people use to secure retirement income. It’s important to note that we focus on our “retirement years” because we may still have time to make up for the losses of our younger working years. Working longer may no longer be an option as we age and our health may be compromised.

Here is the retirement strategy that most people adopt:

  1. Invest their principal in a vehicle with a fixed interest rate, such as a bond or CD, and then try to live off the interest without touching the principal.
  2. Buy an annuity that provides a lifetime income stream.
  3. Take systematic samples from a not guaranteed“market-oriented” portfolio containing the risk of possible loss.

Let’s focus on #3, because options #1 and #2 give guaranteed results.

The problem with systematic withdrawals from an unsecured portfolio with possible risk of loss is that you can never rely on that income! Your income will fluctuate as it is based on a performance-based asset.

Here is the most important thing to consider, which most people overlook. For example, if you use a withdrawal rate of 5% on a “market-based” account and that account (portfolio) declines in a given year, say 10%…you have just reduced the value of your 15% account! This does not even take into account a modest inflation rate of 2 to 3%. In this case, you may have reduced the account balance by 17-18%! Now most would say you need 17-18% to recoup those losses. This is the wrong strategy. It would be better to have more because you start with a lower value.

Good comprehensive financial planning should provide an appropriate mix of market-driven investments for growth and protected types of investment vehicles like annuities and CDs, to name a few. One should never rely solely on market-based accounts to generate consistent, reliable income in retirement, as this is impossible and will always depend on ‘performance’.

When the stock market begins to crash, the daily injections of bad news can instill anxiety, fuel uncertainty, and trigger drastic decisions in even the most seasoned investors. Panic is not a strategy! It is essential to stay focused when the markets are volatile.

Here are five strategies to consider when volatility hits:

  1. Stick to your goals and don’t give up your strategy for something that will be temporary.
  2. Stay invested, because most of us do the opposite and panic selling to lows.
  3. Always stay diverse, and the old adage “never put all your eggs in one basket” still holds true.
  4. Pay close attention to risk management, as it’s always good to determine if you could achieve similar results with less risk.
  5. Keep up to date with what your finance professional is doing, remember it’s your money, and take an active role in managing it.

Brad Rhodes is a member of Syndicated columnists and he lives in Lexington.

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