Encountering a recession right before retirement can be anxiety-inducing for anyone. With market conditions taking on a disproportionate significance in the five years immediately prior to and following an exit from the workforce, it’s no surprise that this period is known as the “fragile decade.”
The current downturn caused by the COVID-19 pandemic has added layers of challenges for savers approaching retirement. Between job concerns, a volatile stock market and no clear insight into when normalcy could return, near-retirees are currently facing a heavy fog of uncertainty.
Unfortunately, notwithstanding the pandemic, recent data has only underscored how the near-retiree demographic is, on the whole, lacking when it comes to retirement planning. According to the 2020 Retirement Income Literacy Survey from The American College of Financial
Services, more than 80% of Americans between the ages of 50 and 75 failed a basic retirement literacy quiz, driven in part by not being informed about safe withdrawals and misunderstandings around the implications of rates of return.
With this preexisting low financial literacy as a backdrop, the pressure on advisors to ensure that near-retirees’ plans remain viable before withdrawals begin has never been higher. However, by using some of the signposts of behavioral finance, advisors can successfully guide their clients through the unpredictability that lies ahead.
In the midst of a once-in-a-lifetime event like the COVID-19 pandemic, everyone is feeling some strain. Sure, near-retirees may be closer to the end of their time in the workforce — but because of their seniority, many are also more vulnerable to layoffs or forced buyouts.
Additionally, despite potential signs that an economic recovery could be on the horizon, market volatility remains high. Taken together, this can pack a powerful punch on these clients’ sense of security. As a result, many will question whether they should turn back and ditch their existing equity allocations and try to hitch their portfolios to products less at the mercy of the stock market.
While such second-guessing is understandable, advisors know that unless there’s an unexpected need to be solved for within an existing retirement plan, rushing for the exits within portfolios can more often than not bring about suboptimal outcomes. Instead, advisors in this situation should discuss with near-retiree clients the goals they set out to achieve in the first place for retirement, and walk them through the structure of their existing strategies to illustrate where the rubber meets the road. Going back to basics can go a long way toward easing worry, while setting the stage if any changes really need to be made.
Don’t try to play the market
Although a recession will tempt many near-retirees to adjust risk allocation midstream, others will be tempted to charge headfirst into the uncertainty by gaming a recovering market.
Traditionally, the markets do tend to preempt the economy when it comes to bouncing back from recessions. With many major indices spiking upward over the past few months, it’s easy to see why banking on better days ahead holds some appeal.
However, while upticks in the stock market are a welcome surprise, the economy still has a number of challenges. Between an overheating, far-overweight tech sector, yo-yoing cyclicals, and the uncertainty around future stimulus, the big picture here is far from rosy. Steep corrections and broad volatility are still par for the course.
Moreover, when it comes to the market, it’s important to remind clients that no one ever knows what lies ahead. So in the midst of a recession caused by a black swan event, making impulsive or temporary asset allocation decisions based on hope is a steep gamble to make. And with near-retirees staring down withdrawals in the not-so-distant future, this risk could turn into a secondary punch that many retirement income plans will, ultimately, be unable to bear.
Do plan ahead
Human behavior is, by nature, imperfect. This presents hefty roadblocks for advisors to steer around. An essential strategy to combat this, particularly with near-retirees during a recession, is to work with clients to think not just one step ahead, but multiple steps ahead, and then identify the offshoots and repercussions of each of those steps.
Just look at the environment we’re in today — the decade-old bull market was exceedingly long in the tooth, so a 2020 downturn occurring, in and of itself, was not a complete surprise.
However, it was the severity and speed of this downturn that caught many off guard. While many near-retirees might have been able to stomach some degree of stress in their retirement savings accounts from market volatility, additional burdens such as job loss or benefit cuts may have sprung into view nearly overnight, complicating the future of their financial stability.
Advisors should proactively sit down with their near-retiree clients and hold candid conversations about the new challenges they face in light of the current recession, and map out the possible stressors and solutions.
Take, for example, the question of job security. If the answer is not a reassuring one, take time now to talk clients through what their planning landscape would look like — before a layoff or forced buyout comes. If this scenario were to occur, what could their options for health care be? Do they have ample emergency savings? Would their existing plan still work if they remain retired and didn’t seek a new job?
In this example, preparing some Plan Bs within existing retirement plans can be helpful as well.
For some, it will be more favorable to stay in the workforce, even with a part-time job, in order to defer Social Security. Sources of guaranteed income can help provide a cushion against lost sources of funding. And tightening up existing budgeting — perhaps from debt consolidation or trimming some everyday sources of spending — can help pad savings accounts and help buy some time. The potential upside from small changes in the near-term can clarify longer-term uncertainty, and can reassure near-retirees that they’re not just waiting for the next shoe to drop.
Do be a partner. Retirement is supposed to be a relaxing time in your life to stop, breathe and take inventory of all that has been accomplished. But when the time to exit the workforce coincides with an economic downturn, the possibility of reaching the finish line gets harder — and scarier — to envision.
No matter what near-retiree clients are feeling, advisors must remember that they are trusted teammates. If support and empathy are at the forefront of an advisor’s practice, then financial stability in retirement can be within reach — even when it’s difficult to see.