Has the Pandemic Hurt Your Retirement Plan? Tips on Diversifying Your Strategy

Transitioning risky investments to safer vehicles and other strategies can help secure your retirement plan.
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By Chad Ensign

Between the beginning of February – when the COVID-19 pandemic hit the U.S. – and the end of March of this year, many investors suffered big hits. Those in their 50s saw an average 11.7% in their retirement accounts.

Chad Ensign

Chad En

And while the second quarter experienced a recovery, the average year-to-date 401(k) return for mid-career employees is up only 1.4%. That can be disheartening if you’re looking for high accumulations in the years before retirement.

On average, however, older investors saw less damage to their retirement portfolios. Why? Because many followed the sage advice of transitioning risky investments to safer vehicles as they aged.

As an investor, it’s important to expect the unexpected – and to have a plan for it. Workers in their 30s and 40s have time to invest for long-term growth. But what about people who would like to retire in 10 years? How aggressive should they be? After all, this next decade may be their last chance to bolster their retirement nest egg before they have to start withdrawing from it.

For many people, it’s time to take retirement saving and investing seriously. And one of the most important areas to focus on is diversifying the portfolio. While this can be a good strategy to help manage risk, it may be even more important at this stage of one’s life.

Here are a few tips on diversifying and overall strategizing:

Consider investment sectors. In the near-term, you may want to consider sectors that are faring well during this period of pandemic turmoil, such as technology, consumer staples and pharmaceuticals. It may not be the best time to invest in airlines, cruises, hotels and restaurants, but you might want to monitor these industries for a turnaround once the virus is near containment. For those in their 50s, it may be prudent to place some of your assets in conservative vehicles.

While investors are generally advised to buy and hold long term, the next year or two could offer growth opportunities in various sectors and countries that recover at different times. Securities that offer short-term gains may plateau after the short run, whereas other areas of the market that recover more slowly could offer higher return opportunities further down the road. It may be helpful to think of the equity portion of your portfolio as more fluid than usual in order to help take advantage of potential gains. However, we believe your portfolio should maintain a long-term asset allocation strategy that is appropriate for your risk tolerance and retirement timeline.

IRA conversion. Because of today’s low tax rates, a timely strategy you may want to consider is converting traditional IRA funds to a Roth IRA. Moving forward, future gains would grow tax-free, and you’ll be able to withdraw that tax-free income during retirement. Note that you’ll have to pay income taxes on those assets in the tax year they are converted from traditional to Roth. It may be wise to transition these funds gradually over several years so you don’t tip your income into a higher tax bracket.

Guaranteed income. In planning retirement income for 10 to 20 years down the road, it’s important to build multiple income streams, particularly reliable ones to help supplement Social Security. The more reliable your retirement income, the less likely you’ll have to tap your cash reserves just to cover basic household expenses. For this reason, many advisors recommend annuities, which provide issuer-guaranteed payouts over a period of your choosing, including for your lifetime and even that of your spouse.

To combine guaranteed income with the opportunity for growth, consider a fixed indexed annuity (FIA). An FIA earns interest credits on your principal, up to a certain amount, based on an external market index such as the S&P 500. When you buy an FIA, you do not own any shares of stock or participate directly in the stock market or index. Instead, FIAs credit interest to your annuity based on a formula. The formula is determined by the insurance company and outlined in your annuity contract.

Be aware that FIA guarantees are based on the financial strength of the issuing company. It is important to read the fine print carefully, because not adhering to policy restrictions may result in early withdrawal charges and/or a potential tax penalty. Be sure to work with an experienced financial advisor to help determine whether a fixed indexed annuity is appropriate for your portfolio.

As you approach your retirement date — even if it’s a decade or two away — remember how debt can get in your way. Make it a priority to pay off debt, particularly high-interest debt. If you own a home, you ideally want to pay off your mortgage before you retire. Aggressively tackling credit card and other forms of debt first can give you additional income to allocate toward paying down your mortgage and contributing to your retirement nest egg.

About the author: Chad Ensign

Chad Ensign is an Investment Adviser Representative and founder of Ensign Wealth Management. He passed the Series 65 exam and has also obtained the Retirement Income Certified Professional (RICP®) designation. Ensign holds life and health insurance licenses in several states, but his primary focus is in Arizona, Utah and California (CA Insurance License #OK68065). He earned his bachelor’s degree in communications from California State University at Sacramento, and he is a contributing author to Kiplinger online.

Investment advisory services offered only by duly registered individuals through AE Wealth Management, LLC (AEWM). AEWM and Ensign Wealth Management are not affiliated companies. Investing involves risk, including the potential loss of principal. Any references to protection, safety, security or lifetime income, generally refer to fixed insurance products, never securities or investments. Insurance guarantees are backed by the financial strength and claims paying abilities of the issuing carrier. Neither the firm nor its agents or representatives may give tax or legal advice. Individuals should consult with a qualified professional for guidance before making any purchasing decisions. A PR firm was paid to assist with media placement. 735238 – 10/20