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Retirement Planning > Saving for Retirement

How Selling Into a Market Rout Can Ruin Retirement Savings

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J.P. Morgan Asset Management has just published its latest Guide to Retirement, which includes  important reminders for advisor clients in or near retirement and worried about the current market turbulence.

They should not cash out of stock positions during or after big down days like the ones we’ve been having for the past two and a half weeks.

A $10,000 investment in the S&P 500 Total Return Index between Jan. 3, 2000, and Dec. 31, 2019, earning 6.06% per year would grow to $32,421 during those 20 years, but if 10 or 20 of the best performing days were missed, that gain would be less than half — roughly $16,000 if the 10 best days were missed and just $10,167 if 20 of them were.  And if that investor were out of the market during the best 30 to 60 days they would have lost money — around 2% to 7%.

Moreover, it’s not unusual for the worst trading days to occur close to the best trading days, so getting out of stocks when losses are large and failing to get back in soon after could be disastrous. Six of the 10 best performing days in the S&P 500 during the illustrated 20-year stretch occurred within two weeks of the 10 worst performing days. In 2015 the time gap was even closer. The worst performing day was Aug. 24; the best performing day was also Aug. 24.

More recently, on Christmas Eve 2018, the S&P 500 lost 2.7%. Two days later, on the first trading day after Christmas, it gained 5%, its best single-day performance since March 2009, when the post financial crisis bull market began.

“Sticking to an investment strategy will benefit you,” says Katherine Roy, J.P. chief retirement strategist at J.P. Morgan Asset Management. “Weather the volatility.” Roy also suggests that investors maintain a three- to six-month buffer of emergency funds to cushion market shortfalls.

Retirement experts from the American College of Financial Services — Wade Pfau, Steve Parrish and David Littell — similarly recommend that investors draw from their buffer asset whenever their retirement portfolio balance falls below its level on their first day of retirement.

They also note if the If an investor believes the market will correct and if the current situation is hurting their income, “now may be a great time to make conversions to Roth IRAs (and pay a lower tax).”

Roy says investors should consider converting to a Roth during the early retirement years before required minimum distributions (RMDs) kick in (now at age 72 instead of 70-½ courtesy of the Secure Act) if those RMDs are likely to push the retiree into a higher tax bracket.

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