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How to Manage the Risk of Financial Markets in Retirement

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Stocks and bonds (mutual funds, ETFs, and the like) are risky. They go up and down. And retirees need to remember that stock market values can fluctuate significantly over time and that stock market losses can seriously reduce retirement savings, according to a recent report published by the Society of Actuaries.

“Stock and bond prices vary depending on company-specific factors as well as economic-induced factors,” said Carol Bogosian, co-author of the Managing Post-Retirement Risks: Strategies for a Secure Retirement report and president of CAB Consulting. “Something we're experiencing quite extensively today.”

To be sure, stock investments generally outperform other investments over time, but also provide more risk of asset loss in any given time period, she said. “And that's important to understand because the timing of the investment losses that a retiree takes is critical for the retiree as it reduces assets or income from investments, and may not be in tandem with how much the retiree can actually reduce their living expenses.”

If they withdraw too much assets during a market loss, it'll negatively affect the rate of return, she said. “Significant reductions in assets in down markets increase the potential of running out of money for the retiree,” said Bogosian. That's the big risk.”

So, what are some ways to manage the risk?

Use diversification

Diversify your investments across stocks, bonds, and cash, but based on your investment time, horizon, said Bogosian. “Shorter horizons, cash; longer horizon, stock” she said.

Consider pooled approaches

Bogosian recommends using pooled investments - such as mutual funds and ETFs, index funds, target-date funds - to diversify within stocks and bonds. “Most of us are not good stock pickers,” she said.

Use a range of opportunities

Invest in a range of opportunities such as U.S. and international stocks and different types of specific pool investments that may be focusing on health care or possibly the broad stock market index, she said.

Don’t forget fees

Always consider fees and expenses when choosing and monitoring your specific investments, said Bogosian. “Fees and expenses always reduce your potential income from your investments and your income in retirement,” she said.

Do it yourself or with an adviser?

Investing, said Bogosian, is more a discipline than a science. And those disciplined and willing to learn can certainly invest on their own, said Bogosian.

“I think everyone could learn to do it, but most people aren't disciplined, don't have the interest, and don't have the confidence,” she said.

And in that case, an advisor is your best option, said Bogosian. “And that is something that has to be considered really in retirement, at least initially, to get you an understanding of what you're facing, and then, subsequently, periodically to update your plan. But yes, if you're not disciplined and you're not going to go gain the knowledge, don't do it yourself.”

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