By Beau Kemp, CFP, RMA
Retiring is a stressful time no matter how equity markets are performing. It is normal to be nervous and have doubt creep in, and now throw those emotions on top of the current environment we are in. Headlines are constantly reminding us about the bear market and how things will only get worse, but the truth of the matter is no one really knows what will happen in the future.
As always, creating a plan is one of the best ways to calm these fears. An appropriate retirement plan accounts for bear markets. After creating the plan, you should know what type of adjustments you may have to make. Everyone’s plan and circumstances are different, but in essence, they’re all the same math problem – you have money coming in, and you have money going out.
These are the things you can control, and you must decide what is most important to you. Some decide they are willing to work a little longer (money in), and others decide they are done working and they will cut their expenses (money out).
Once you have your plan, you are ready to implement it. We use the asset-liability approach to build our retirement portfolios. Ideally, we are covering your expenses with individual bonds for the first 7-10 years, with the rest of your financial assets invested in passive index funds.
This brings us to one of the trickiest questions – should you dollar-cost average in your growth portion, or invest the lump sum today? Historically, investing the lump sum leads to a better outcome over the long run. However, this only works if you understand that there will be volatility throughout the years. Therefore, dollar-cost averaging may make sense depending on how you will feel emotionally if there is another decline in the market. If you decide to dollar-cost average, know that the odds are not in your favor and that you are essentially trying to time the market, which is an impossible game to win over the long run.
The data mentioned in the video from Dimensional Fund Advisors is below – The Cost of Trying to Time the Market:
About the author: Beau Kemp, CFP®, RMA®
Beau Kemp, CFP®, RMA®, is a financial planner at Sensible Money. He started as an intern while finishing his final semester at Northern Arizona University and has enjoyed seeing the impact a financial plan has on a person’s life ever since.