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Thinking of retiring into this market?

Key takeaways

  • High inflation and economic uncertainty are making this an unusually challenging time for those just hitting retirement.
  • Be cautious about making permanent adjustments to your portfolio in reaction to temporary market conditions.
  • A financial professional can help you better understand the extent to which inflation and potential market volatility may increase the risk of outliving your assets.
  • Considering inflation protection, reducing expenses, avoiding selling stocks, and working longer may have the potential to help.

Hitting retirement should be a celebration. A time when you can unplug from the daily grind once and for all, and instead focus on making the most out of each and every day.

But recent market and economic dynamics are adding an extra layer of uncertainty for those nearing or just beginning retirement. It's hard to feel confident in the size of your nest egg when inflation is elevated and recession risk is creating uncertainty in markets. 

Experiencing so much uncertainty at once may make recent and pre-retirees feel that they have to do something in response. But if you have a sound financial plan that you've been following, you may very well still be standing on solid financial ground—despite the shifting economic and market landscape. Here's what to consider if you're in or nearing this critical transition.

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1. Avoid making any emotional decisions

Once you're near or in retirement, it can feel as though your portfolio won't have enough time to recover from a market setback. However, resist the knee-jerk temptation to sell out of stocks when the market is going through a challenging period. "When markets feel volatile, the urge to react can feel compelling," says Naveen Malwal, institutional portfolio manager with Fidelity's Strategic Advisers LLC.

The problem is, it's nearly impossible to accurately predict short-term market movements. And investors who sell into a downturn often miss the market's subsequent recovery, putting a huge dent into their long-term return potential. Missing out on only the market's 10 best days over roughly 4 decades has historically reduced wealth by as much as 55%.1 

Moreover, above-average inflation means that retirees need the growth potential of stocks as much as ever. "Historically, stocks have experienced positive returns even during periods of higher-than-average inflation, because many companies are able to pass on cost increases to consumers," says Malwal. "This can lead to earnings growth despite high inflation. And rising earnings have generally led to higher stock prices over the long run," he says. So avoid making permanent portfolio shifts in reaction to what are likely temporary market conditions.

2. Get a clear assessment of where you actually stand

When there's a general sense of unease in the air, it can give you a sense of unease about your finances. But what really matters for you are the numbers specific to your situation. If you're already working with a financial professional, this can be a good time to check in on your plan and make sure it holds up well under a variety of different market scenarios.

"One thing you can do is test the assumptions," says David Peterson, head of wealth planning at Fidelity. Suppose that inflation is the worry that really keeps you up at night. In that case, Peterson says, your financial professional can help you understand how your portfolio and spending may fare under a variety of different inflation scenarios.

The example below shows how the numbers might look under 3 different hypothetical long-term inflation rates for a recently retired couple. While modeling can't predict the future, it can help you understand how well-positioned you may be to make your money last. (Note that these are hypothetical rates for illustrative purposes only, and do not represent a prediction of future inflation. In particular, a 5% rate would be much higher than long-term historical average US inflation rates.)

An infographic labeled the cost of sustained inflation explains the potential hypothetical impact on retirement outcomes for a couple age 66 with a $1 million portfolio, withdrawing $50,000 annually. With 2.5% inflation, the couple has a 77% chance of never running out of money. With 3.5% inflation, they have a 66% chance of never running out. But with 5% long-term inflation, that falls to only a 41% chance of never running out of money.
Source: Fidelity. See footnote 2 for methodology and details.

If you aren't already working with a financial professional, this could be the time to consider starting (learn more about the planning options Fidelity offers). If you prefer and are more comfortable with do-it-yourself financial planning, retirement calculators may help you get a better picture of where you stand.

3. Potential adjustments if you're pre-retirement

If you haven't yet retired and your current plans leave you vulnerable to an eventual shortfall, one effective strategy is to keep working longer than planned (if you're able to), whether full time or even on a part-time basis. Working longer can let you save more, can give your portfolio longer to potentially grow, can help you benefit from delaying Social Security, and means you'll have fewer years in retirement to pay for. Extending your career even by 1 to 2 years could make a significant difference.

Chances are you shouldn't overhaul your portfolio in reaction to recent developments. But it never hurts to check in on whether your portfolio is well-positioned for the long term. In the face of complex uncertainties, a well-diversified portfolio that includes some guaranteed income, cash, fixed income, and inflation protection, may help you withstand potential future inflationary pressures or market volatility. Here's why each of those areas is important to consider:

Guaranteed income – One approach is to make sure that your essential expenses in retirement are fully covered by guaranteed income sources like pensions, Social Security, and annuities.* This can help provide certainty of maintaining a reasonable standard of living no matter what the market does, and peace of mind in times of volatility. The pre-retirement years can be a good time to evaluate what guaranteed sources you expect to have and make a plan to potentially cover any shortfalls with annuities.

Cash and fixed income – Holding sufficient cash and bonds in retirement can potentially help you avoid having to sell stocks at a bad time, like if you need to take withdrawals during a down market. For example, the so-called bucketing strategy calls for keeping a certain number of years of expenses in cash and in bonds, which can potentially provide a multi-year runway for your stock portfolio to bounce back from any decline.

Inflation protection – You can build inflation protection into your portfolio in a variety of ways, including with a healthy allocation to stocks, with exposure to real estate and commodities, with an allocation to Treasury Inflation-Protected Securities (TIPS), and potentially with annual-increase features on any annuities you hold. (Granted, all of these investments come with particular risks to understand; for example, commodity investments can be volatile, and real estate investments can be illiquid.) Rolling annuities or laddered fixed income products could be other strategies to consider. (Read more about how to protect your money from inflation.)

4. Potential adjustments if you're in retirement

For many people, heading back to work at this point is no longer an option (or at least, not an appealing one). Instead, the most powerful move you may be able to make is to reduce expenses. If your planning reveals that your portfolio can't sustain your current level of spending, then consider whether moving to a lower-cost area (potentially combined with downsizing) could bring your plans back into balance. If you're a homeowner, this could also let you unlock some of the appreciation that home prices have enjoyed in recent years.

As for your portfolio, once you're in retirement it may be even more important to try to avoid selling stocks during a pullback. If you're in the early years of retirement, you may be vulnerable to so-called "sequence of returns risk." This is the risk that the market hits a downturn in your initial years of retirement.

As the chart below shows, hitting a downturn in your first retirement years—and selling stocks into the downturn—can cause a permanent erosion of your wealth that your portfolio may never fully recover from. (By contrast, bear markets that fall later in retirement, after a series of positive returns, generally don't have such a severe effect on hypothetical or modeled planning outcomes.)

A chart labeled the importance of timing shows hypothetical outcomes in two scenarios, with a starting portfolio of $1 million. In one scenario, the portfolio first experiences a sequence of positive returns, followed by a bear market later in retirement. This portfolio still has a balance of more than $3 million after 30 years in retirement. In the second scenario, the portfolio first experiences negative returns, followed by a bull market later in retirement. This portfolio balance falls to $0 by year 27 of retirement.
Source: Fidelity. Y axis shows total portfolio value over time as stock market fluctuates and retiree takes withdrawals. See footnote 3 for methodology and additional details.

Rather than selling stocks into a decline, try to pull other levers during those critical early years. If your stock portfolio is down but your bonds have gained or held steady, you may be able to trim your bond holdings to generate cash instead (and rebalance your portfolio in the process). Or perhaps you can temporarily reduce spending while you wait for your stock portfolio to recover. 

Retirement may not be quite as smooth sailing as you'd once dreamed. But with a solid plan, you should be able to navigate whatever lies ahead.

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1. Source: FMRCo, Asset Allocation Research Team, as of June 30, 2022. The S&P 500® Index, a market capitalization–weighted index of common stocks, is a registered trademark of The McGraw-Hill Companies, Inc., and has been licensed for use by Fidelity Distributors Corporation. This example is for illustrative purposes only and does not represent the performance of any security. Consider your current and anticipated investment horizon when making an investment decision, as the illustration may not reflect this. The return used in this example is not guaranteed. 2. Hypothetical portfolio is assumed to be a taxable account invested in a 60% stocks, 40% bonds allocation. The values in this infographic are based on a Monte Carlo simulation–based approach to estimate potential growth of account balances. The analysis is based on historical market data to estimate a range of potential outcomes for a hypothetical portfolio under different market conditions. Monte Carlo simulations are mathematical methods used to estimate the likelihood of a particular outcome based on market performance historical analysis. While over very long periods of time, markets have averages, it is often the case that the market performs both above and below these averages. The Monte Carlo simulations are designed to reflect this historical market volatility. Average annual rate of return based on the assumed asset allocation is assumed to be 6.65% and average annual volatility is assumed to be 11.61%. "Best case" scenario represents the 97.5th percentile of results, "median" represents the 50th percentile, and "worst case" represents the 2.5th percentile. 3. Each scenario experiences the same set of annual returns over a 30-year period, only in inverse order or "sequence." Each aims to withdraw $50,000 per year. The blue-line scenario experiences a sequence of negative returns in its early years. The green-line scenario, in contrast, experiences positive returns in its early years. Returns are hypothetical and for illustrative purposes only, based on assumptions of 6.8% average annual returns and 13% average annual volatility. Hypothetical returns are not intended to predict or project investment results. Your rate of return may be higher or lower than that shown.

This information is intended to be educational and is not tailored to the investment needs of any specific investor.

Keep in mind that investing involves risk. The value of your investment will fluctuate over time, and you may gain or lose money.

Diversification and asset allocation do not ensure a profit or guarantee against loss.

Stock markets are volatile and can fluctuate significantly in response to company, industry, political, regulatory, market, or economic developments. Investing in stock involves risks, including the loss of principal.

In general, the bond market is volatile, and fixed income securities carry interest rate risk. (As interest rates rise, bond prices usually fall, and vice versa. This effect is usually more pronounced for longer-term securities). Fixed income securities also carry inflation risk, liquidity risk, call risk and credit and default risks for both issuers and counterparties. Lower-quality fixed income securities involve greater risk of default or price changes due to potential changes in the credit quality of the issuer. Foreign investments involve greater risks than U.S. investments, and can decline significantly in response to adverse issuer, political, regulatory, market, and economic risks. Any fixed-income security sold or redeemed prior to maturity may be subject to loss.

Changes in real estate values or economic conditions can have a positive or negative effect on issuers in the real estate industry.

The commodities industry can be significantly affected by commodity prices, world events, import controls, worldwide competition, government regulations, and economic conditions.

Annuity guarantees are subject to the claims-paying ability of the issuing insurance company.

Past performance is no guarantee of future results.

Strategic Advisers, Inc., is a registered investment adviser and a Fidelity Investments company.

An annuity is a contract issued by an insurance company and purchased by a consumer for long-term investing. An annuity is not a mutual fund. Various fees and expenses are associated with annuities and, in certain situations, withdrawal penalties may be applicable.

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