We spoke our partners, the investment professionals at Kaye Captial Management, to deep dive into retirement savings strategies for surviving the market’s ups and downs.
In general, how do market downturns impact 401(k) accounts?
Investing in the stock market comes with inherent risks, including market volatility. One key to mitigating these risks is to take a long-term approach to investing. Retirement plans, like 401(k)s, should be seen as long-term investments that can handle market downturns, especially for younger participants. Think about the mountain of a stock market graph—although there are fluctuations downward, the general trend is positive. As such, sit tight with market downturns, because a well-diversified portfolio should net a positive return over the long term.
For individuals closer to retirement, choose assets with less risk to maintain principal. Because you have a shorter time horizon, selecting lower risk assets may not generate a high yield, but should help you retire comfortably by preserving principal.
How should 401(k) investors react to market volatility?
Market fluctuations are part of the game when it comes to investing. If you are properly diversified and you are able to stomach the volatility, you will be better off in the long-term.
Participants who are not in target-date funds or models should rebalance their portfolios during market volatility to make sure their accounts have appropriate risk parameters.
How does market volatility impact retirement savers over 50, or those close to retirement?
Market volatility is more impactful for those over 50 because they have a shorter time horizon for investment than younger participants. However, those over 50 tend to know what it’s like to go through market fluctuations, so they understand that although the market can be is volatile short-term, investing for the long-term can contribute to the growth of your nest egg. A participant over 50 is better served to invest in less-risky assets to preserve their principal. By doing so, they mitigate the potential for a major crash just before retirement.
People close to retirement do not have the luxury of waiting out volatility. Older savers should look at their total portfolio risk exposure and decide if they are comfortable with the risks they are taking in their portfolios.
What steps should retirement savers take now to prepare for a potential market downturn?
Rebalance your portfolios, or ensure your investment third party accommodates automatic rebalancing, to ensure proper diversification to mitigate short-term market downturns. Modern portfolio theory dictates that diversifying your portfolio among asset classes allows for a much more consistent and stable return on investment. Rebalancing annually also ensures the participant that they are properly diversified.
Savers should consistently monitor their portfolios and rebalance them to the correct risk tolerance they believe is right for them. You cannot predict a market turndown, but you can prepare by ensuring your portfolio has the appropriate amount of risk for the return you expect.
Generally, how important a consideration is age when planning for retirement as part of a couple? Is this something couples tend to overlook?
Investing early, and often as a couple, can dramatically impact your success for retirement and is often overlooked at a young age. Compounding interest generated over time benefits those who save early and can put you well ahead of your peers, helping you retire on time.
More important than age is creating a financial plan and sticking to it. Understanding where your money is going on a daily basis and creating a plan for the future is necessary for success. Each person is different; some want to work until they are 70 while others want to retire at 60. Creating a plan and sticking to it will help couples identify the best time to retire.
This blog serves as information material from Kaye Capital Management (“KCM”) and does not serve as investment advice or recommendations by KCM or Ubiquity Retirement + Savings (“KCM”). Please remember that past investment performance is not be indicative of future results. Different types of investments are associated with varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Kaye Capital Management (“KCM”), or any non-investment related content, made reference to directly or indirectly in this newsletter will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this newsletter serves as the receipt of, or as a substitute for, personalized investment advice from KCM or Ubiquity. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. Both Ubiquity and KCM are neither law firms nor certified public accounting firms and no portion of the newsletter content should be construed as legal or accounting advice. A copy of the KCM’s current written disclosure Brochure discussing their independent advisory services and fees is available upon request. Ubiquity is not affiliated with any independent services you may solicit from KCM.