When stock market volatility spikes, financial advisers typically remind investors they have time to keep the money invested and let it ride out the cycle, but what about people already in retirement?
As a whole, people in their 70s and beyond used to have very little invested in stocks, but that has changed in recent years due to low savings rates and longer life expectancy, said Kathryn Bruzas Hauer, a financial adviser in Aiken, S.C., and author of Financial Advice for Blue Collar America.
"Ten years ago, if you were in your 70s, you were in T-bills and bonds," she said. "Now, people are living longer, they're coming into retirement with pretty low balances and many of them don't have pensions."
To make up the difference, advisers have urged retirees to hold more stocks, which have proved to be a better inflation hedge than other asset classes over long periods of time.
Today, it's not uncommon for retirees in their 60s and 70s to have about 50 percent of their nest eggs invested in stocks in the hopes of beating inflation over the long run, she said.
And while many of them say they are comfortable with that risk level, the recent market plunges surely rattled more than a few.
Even the best-designed risk tolerance surveys can't replicate the real fear that comes when a portfolio takes a significant dip, Hauer said, so now is a good time to assess your own reaction to the recent market swings.
Here are four things for retirees to keep in mind:
1. DON'T PANIC, BUT YOU CAN ADJUST.
"You're not married to your risk tolerance," Hauer said. By the same token, she advises clients to make tweaks to their asset allocation, perhaps adjusting stock levels by 20 percent or so, rather than going all in or out.
"We don't believe this is the beginning of a major market downturn," said David Henderson, a financial adviser with Jenkins Wealth Management in Englewood, Colorado. "With that as a backdrop, we have to figure out the best risk measure for their situation and if they can't handle the volatility they shouldn't be in equities."
2. THINK IN BUCKET TERMS.
If volatility continues, it becomes even more important to manage portfolio withdrawals to avoid selling stocks into a downturn. Some advisers adhere to a strict bucket strategy, which involves investing money in separate sleeves earmarked for specific phases or years in retirement. Others simply manage a portfolio focused on total return, but they segment a certain number of years' worth of living expenses-or their required minimum distributions-to hold in cash. That way, a retiree in theory is able to avoid selling when stocks are down.
3. Mind your RMDs.
Speaking of those required distributions that must come out of 401ks and IRAs beginning in the year one turns 70 , remember that just because you're required to pay tax on that money now, it doesn't mean you have to spend it. It sounds obvious, but sometimes retirees get in a mindset that they can simply spend their RMDs, forgetting that if they substantially outlive their life expectancy or their account balances drop significantly, they'll need extra cash to meet expenses.
4. LIFE ISN'T ALWAYS SHORT.
While many older clients may feel overexposed in the stock market, particularly in recent days, they should keep in mind that even people in their mid-60s can live another three decades or more, said Austin Frye, a financial planner and founder of Frye Financial Center in Aventura, Florida.
"One client called saying he's 'getting too old for this' volatility," Frye wrote in an email. He reminded the 65-year-old that there is a strong chance either he or his wife will live into their '90s.
"Point being, a 65-year-old still needs to be investing for the long term," he said.