Overcoming Market Uncertainty: Financial Strategies for Retirement Savers

Learn strategies to manage retirement savings during market uncertainty, inflation, and shifting interest rates.

Market uncertainty occurs when investors find it challenging to analyze current and future market conditions due to market volatility.  Various factors, such as inflation, central bank policy changes, interest rate fluctuation, investor behavior, unemployment news, and industry buzz, can cause market volatility.

Market uncertainty can be stressful, and if you are preparing and saving for retirement, an unpredictable economy might leave you anxious. Understanding how to manage your money and investments during such times may help alleviate some of the stress and uncertainty you feel as you work to preserve and grow your hard-earned wealth.

 

How can I keep up with inflation in retirement?

Inflation is generally a large-scale measurement of prices over a given period of time, such as the increase in cost of living nationwide, or the overall increase in prices. For many investors, inflation is a concern because as companies watch their costs rise, and the price of materials they need to produce products increase, producing goods and services becomes more expensive. This causes profits to fall, lowering stock prices. Fortunately, there are several strategies that may help you keep up with inflation. Consider these suggestions:

• Hold onto your stocks – It is true that inflation can be a downside for growth stocks because companies during periods of inflation have to spend more to produce their products, which drives down stock prices. However, over the long term, stocks have been able to outpace inflation. Value investors are less concerned about inflation. Over the past 40 years, inflation in the U.S. has averaged around three percent per year, while the S&P 500 index has averaged over 10%.

• Inflation-protected bonds – As you near retirement, you may be considering revising your portfolio toward holding more fixed-income investments, like inflation-protected bonds. Treasury Inflation-Protected Securities (TIPS), for example, help to mitigate the effects of inflation by adjusting the principal for inflation and deflation. The TIPS goes up with inflation and down with deflation. When the TIPS matures, you receive either the increased (inflation-adjusted) price or the original principal, whichever is greater. There is virtually zero risk that you will ever get less than the original principal. TIPS are subject to market risk and significant interest rate risk. Their longer duration makes them more sensitive to price declines associated with higher interest rates. The biggest downside is that you could have made more money elsewhere.

• Don’t hoard your cash – You should consider saving up enough cash to cover expenses and unexpected emergencies for up to 3 to 6 months. Everyone is different, so the amount you would have to save varies from person to person, or family to family. However, you don’t want to hoard all of your cash for fear that the market might crash at any point. The problem with hoarding your cash is when inflation rises, your return on the cash you have will be lower. Instead, invest the excess cash you saved after compiling an emergency fund into low-risk investment opportunities such as money markets, treasury bills, certificates of deposit, high-yield savings accounts, index funds, or mutual funds. A financial professional can help you figure out a beneficial approach for your strategy. 

• Four percent rule – Spend less to save more. If you are nearing retirement or already retired and concerned about preserving your money throughout your retirement, the four percent rule is a popular approach used by retirees looking to manage their spending to stretch their savings. The idea is that you shouldn’t withdraw more than four percent of your retirement account per year. Some financial analysts suggest this is even too much. However, a financial professional can help you create a budget that aligns with your financial goals.
  
  

How can I receive consistent income during uncertain economic conditions?

For investors, especially older individuals, having a consistent and reliable income stream is important. In a world that regularly experiences changing interest rates, market fluctuations, and uncertain economic conditions, having a financial strategy, being consistent, and being willing to reassess your portfolio and modify it if needed can help you maintain an income stream when the market goes haywire. Here are a few ideas to consider:

• Value investing – Being a value investor focused on stocks that offer dividends could help to provide income over time as your dividend payments increase. There are investors whose financial strategy is to live off their dividends, thus having an income stream without touching the investment principal. While this may be a savvy idea, you should keep in mind that companies may reduce or eliminate the payment of dividends at any given time and dividend payments are not guaranteed.

• Bond laddering – Bond laddering consists of investing in bonds with different maturity dates to help mitigate interest rate risk. When a bond matures, you reinvest the principal in new bonds with the longest term you originally chose for your ladder. You can reinvest at higher rates as interest rates increase.

• Diversification – Being diversified in your investment approach may help to mitigate some of the risk that comes from interest rate changes, fluctuation in the market, and erratic market conditions. Diversification does not, however, protect against market risk.
  
  

What do I do if my retirement account is in the bank and the government cuts interest rates?

A Federal Reserve rate cut may be welcome news from some borrowers, but this might not settle well with others, particularly retirees. As rates decrease, yields on savings accounts, fixed annuities, and certificates of deposit do as well. They also squeeze pensions and long-term care plans. Long-term care plans are impacted because a portion of the cost of long-term care insurance is generally covered through yields on investments. Low interest rates tend to squeeze those returns. Insurers will then be forced to hike premiums that may have already been increased. Pensions are largely invested in fixed-income investments, which depend on higher interest rates and increased stock returns.

 

What steps can I take next toward my financial future?

It’s time to take control of your financial future. Review our retirement checklist to get a clear, step-by-step guide on strategies that can help you overcome market uncertainty and navigate investing in retirement. Access the checklist here.

 

 

 

_Sources:

_{Bond Laddering: How it Works, Benefits, Variations (investopedia.com)}

_{7 Ways That An Interest Rate Cut From The Fed Impacts Retirees | Bankrate}

_{TIPS — TreasuryDirect}

_{What Is The 4% Rule for Retirement | New York Life}

_{5 Ways To Keep Inflation From Wrecking Your Retirement | Bankrate}

_{Here’s how inflation affects stocks: 5 things you need to know | Voya.com}

_{Important Disclosures:}

_{The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial professional prior to investing.}

_{Investing involves risks including possible loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk in all market environments.}

_{Past performance is no guarantee of future results.}

_{There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio.}

_{All information is believed to be from reliable sources; however, LPL makes no representation as to its completeness or accuracy.}

_{This article was prepared by LPL Marketing Solutions.}

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