Retirement Fears, the Economy and the Market

By Paul Schatz

If there is one lesson Americans have learned these past two years, it’s that anything can happen at any time. The COVID-19 pandemic has left many of us feeling more uncertain and vulnerable than ever before.

For affluent professionals in Connecticut, this can translate into unprecedented fears about retirement, the economy and the stock market. How do you invest for a future that feels so uncertain? By controlling what you can and planning for what you can’t.

In this guide, we’ll talk about some of the biggest concerns facing Connecticut investors today. We’ll look at market volatility, how to handle Social Security and what to do in the face of catastrophic premonitions and predictions of an imminent collapse. We’ll also help you determine where to go for advice you can trust.

Chapter 1

How to Protect Your Retirement Assets from Market Volatility

Market volatility is among the biggest fears for many retirees. Retirees typically depend on their investment portfolio for much of their retirement income. Cash management can be a constant worry. This can put retirees in a precarious spot should the market take a turn for the worse when you need to sell your investments. While you can’t control the stock market, there are ways to help you mitigate the risk of volatility during retirement.

The first step to ward against market volatility is to stay in the market. While it may sound counterintuitive, keeping your money in cash, even during volatility, is more likely to work against you than for you. Money kept out of the market may be sheltered from market declines, but it also misses out on the gains when the market recovers. History shows us the market usually recovers, often with a strong rebound.

You should retain some cash, but ideally only as much as you need to cover your expenses for the next couple of years. The rest should be invested according to your financial plan.

This leads to the second most important step to take during market volatility: sticking to your financial plan. Volatility can be terrifying and leave you questioning everything about your future, but it’s important not to act on these fears. Investment decisions made out of fear often lead to even more losses. And timing the market is best left to the experts.

Your retirement plan should be built to withstand such short-term volatility because volatility is to be expected. If you’re worried you haven’t built a robust enough plan, work with your financial advisor to explore more protection strategies.

If market volatility concerns are weighing on you, you might be taking too much risk with your investments. There are financial products which can help reduce this risk, that offer protection against market drops and may even provide a source of guaranteed income. It’s important to work with an advisor who can explain all the features of a given financial product, including it’s costs, before you invest. Here’s a specialized guide about retirement planning.

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At Heritage Capital, we help clients prepare for whatever life has in store. For more on what this looks like, click here.

Chapter 2

Avoid These Mistakes with Your Social Security

Making decisions about Social Security can be one of the biggest headaches retirees face. Questions of when to start taking your benefit, how to coordinate spousal benefits and how much you can expect to receive can be challenging. Add to this recent headlines about the Social Security trust fund running out by 2033, and it’s easy to see why this “benefit” may feel more like a burden.

The first Social Security mistake to avoid is getting scared into claiming your benefits too early. Those headlines about Social Security insolvency might tempt you to claim before your full retirement age. This means locking yourself into a lower monthly benefit.

Meanwhile, each year you wait to claim your benefit until age 70 will increase that monthly payment. For many wealthy professionals in Connecticut, this means you should try to postpone claiming your benefits.

There is an exception to the delay strategy, however, that can lead to the second Social Security mistake: using other savings to cover a Social Security shortfall. If you delay claiming Social Security but need to withdraw from other retirement income sources, the delay could cost you more in the long-run than claiming early.

When you withdraw more than you should in the early years of retirement, it handicaps your portfolio’s long-term growth potential. Withdraw too much, and you run the risk of running out of money later in retirement.

Similarly, if you’re in poor health or are unsure of your longevity, you may not want to wait to claim your benefit. So you might want to carefully evaluate your life expectancy before committing to a lower Social Security monthly benefit.

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Chapter 3

Are You Worried About Market Noise, Premonitions and Fear of an Imminent Collapse?

Market noise, both from day-to-day volatility and news commentary, can easily compound investment fears. With day-to-day volatility, it’s important to remember this is both normal and short-term. The market doesn’t move in a straight line and a sudden decline doesn’t always mean a collapse is imminent. Keep your focus on the long-term.

No one can predict the future. This is especially true where the stock market is concerned. Don’t let premonitions and emotions drive your financial decisions.

Remember, too, that the media is not a good financial guide. The media’s goal is to get as much attention as it can, and this often means making things appear worse than they are. The news media loves to sensationalize market events because this is what sells headlines and gets them the most eyeballs.

When you see market commentators predicting an imminent collapse, often the best thing you can do is turn the TV off. If you’re still concerned, speak with a fiduciary financial advisor who will put your best interest and not a media corporation’s bottom line first.

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Chapter 4

Are You Taking Unnecessary Risks?

While fear may drive many investors to be too conservative with their money, it’s also possible to swing the other way by taking on unnecessary risk. You may have heard that risk and reward go hand-in-hand with investing, and this is generally true.

The more risk you take with your investments, the higher your potential long-term return should be. But the key word here is “potential.” Risk is not a guarantee for return, and thus should only be taken when necessary.

A good rule of thumb is to never take on more risk than you need to reach your financial goals or than your portfolio can afford. Let’s assume you have saved $500,000 and your goal is to have $1 million in 10 years.  If you can save $1,000 per month, you only need about a 6% average annual return to reach your goal.

There may be no reason to pursue an aggressive investment strategy that might yield a 10% annual return, but at a risk of getting 0% or a negative return.

By chasing higher returns than you need to reach your goals, you increase your risk of never reaching your goal or of losing everything in pursuit of it. When developing your investment strategy, work on defining the exact dollar amount and timeline for your financial goals. Then you can work backwards to determine how much return, and by extension how much risk, you need to reach those goals.

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Chapter 5

How Behavioral Finance Impacts Your Investment Strategy

Behavioral finance is becoming increasingly prominent in the financial industry. Behavioral finance is the study of how psychology impacts investment and financial decisions. It looks at why investors may act irrationally, often against their own best interests, and how emotions impact our financial behavior and the financial mistakes we make.

Behavioral finance says that human beings often have certain cognitive biases, which impact our decision-making processes. For instance, the loss aversion bias means we generally feel the pain of a financial loss more acutely than the pleasure of a financial gain. This can lead us to being more concerned with avoiding loss than seeking gains.

As a result, we may avoid small risks even when the potential return shows merit. This is why many investors may keep too much of their savings in cash rather than take the risk of investing it. Many don’t realize that keeping money in cash is a guaranteed loss because savings account returns don’t keep up with inflation. So every day your money sits in a low-interest savings account, you are losing money through the erosion of your purchasing power.

On the flip side of the loss aversion bias is an overconfidence bias, which causes people to overestimate their own abilities and knowledge. This can lead to poor investment decisions. For example, if you incorrectly believe you can predict the market, you may try to time your investment purchases and sales with market swings.

But history shows us it is nearly impossible to accurately time the market over any longer length of time. A far more reliable strategy is to take a long-term, buy-and-hold approach that lets you ride the market swings over time.

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Chapter 6

Why a Fiduciary Advisor Should Manage Your Retirement Plan

When retirement fears, the economy or the stock market have you feeling anxious about your investments, the best course of action is to seek guidance from an expert. However, not all financial professionals can be counted on to put your best interest before their own. A perfect example of this is the news media, which is more concerned with getting viewers for its content than providing you with sound financial advice.

For the best advice, you should seek out a fiduciary financial advisor. Fiduciaries are the only financial professionals legally and ethically required to always act in their clients best interest, even when doing so goes against their own. A fiduciary financial advisor can never recommend a product or strategy if there is a better option available to you.

Likewise, fiduciaries are required to disclose any management fees or conflicts of interest that may arise from working with them.

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If you think a no-obligation conversation with a fiduciary financial advisor can help, schedule your complimentary call with Paul today