By Edwin Morrow, CFP®
Even though the average return of the stock market is about 10% per year for nearly the last 100 years, there have been–and likely always will be–periods of loss, and sometimes significantly so†. Here are some aspects to be aware of if you’re considering retirement during a down year.
Building a business or establishing yourself in a highly compensated career can give you confidence about your financial future. All of your hard work has created something of tangible value, and it seems reasonable to expect a nice dividend down the road—in the form of a retirement you hope to enjoy.
What if things turn south?
But what happens if you’re retiring in a down market? Maybe the profits from your business dipped or you had a loss, or you didn’t get the bonus you were counting on. Suddenly you’re facing two distinct concerns:
- What to do in order to make up for the lost income
- Longer-range stress about staying on track for retirement
If you own a business, your concern may be well-founded and shared by other business owners recently surveyed:
- More than 75% were going to rely on the sale of their business to fund their retirement‡
- One-third older than 50 have a hard time finding a buyer
- Only 20% successfully transition to a new owner§
Executives, too, are often at the mercy of an uncertain future. Compensation might not meet your expectations, or a reorganization could leave you out of a job. In fact, only half of Americans are steadily employed at the same job throughout their 50s¶.
Moreover, however you expect to fund retirement, a tough year could make it that much harder to stick to your plan. A recent study reports that only 22% of people approaching retirement age believe that they’ll have enough money to maintain a comfortable standard of living#.
Scattered assets, unseen issues
A first step in dealing with concerns about retirement may be to realize that uncertainty is natural and to create a financial plan that considers the potential for early retirement and down markets.
Almost everyone is apprehensive about retirement. Even a couple with $2 million in assets, which if invested carefully seems like enough to support a modest lifestyle after they stop working, might still be concerned about their retirement prospects. In a case like that, couples should focus on the specifics of their goals and assets through projections that include worst-case scenarios within the realm of possibility, which may be able to allay some of their concerns.
Lackluster years are bound to come now and again, for any number of reasons. Diversification can help reduce the impact of a down year in any particular category of investment and smooth out returns. What’s important is how you respond, and that likely depends on the current state of your overall finances. Looking at the picture more broadly may suggest other issues as well as potential solutions.
For example, an executive whose compensation was lower than expected might have also accumulated significant wealth in “deferred” assets such as stock options and tax-advantaged retirement plans. In this low-income year, it could make sense to exercise some or all of the stock options, when their impact on the executive’s tax bill might be minimized. It may also make sense to allocate more to Roth accounts or even convert a portion of a traditional IRA to a Roth. Taking this kind of broader view of retirement planning could help address concerns about current and future tax consequences while also potentially increasing income during retirement.
A business owner, too, should consider the larger context. Has this in fact been a bad year? Or have the fundamentals of the business changed? That kind of realistic assessment could lead to a variety of conclusions. Are there other things you might do to prepare for retirement?
For example, a business owner might explore a sale now to a strategic buyer willing to look past current issues to see the company’s long-term potential. Or the owner could refocus attention on building up assets in retirement plans that would be unaffected by what may happen to the business.
In all of these situations, the immediate and longer-term responses to current headwinds may vary widely. But the common thread is thoughtful planning with an experienced advisor. Part of our job is to work with you to help create a plan that will give you comfort and confidence about the future.
Getting the advice you may need
Huntington Private Bank® advisors understand the many roles and the responsibilities that you fill. Connect with your Huntington Private Bank advisor to outline a plan that can help alleviate your concerns. To learn more, please contact your Huntington Private Bank team to see how we can help, or find a Huntington Private Bank Office near you.