Could you have planned for this? Investors of all ages are thinking it: could I have done anything to protect my investments from the swift market decline as a result of the COVID-19 fallout? This question is especially relevant for individuals who planned to retire in the next year, as the current economic climate and stock market conditions have likely forced you to second-guess your plans. Whether you’ve been diligently monitoring your retirement plan for years or simply winging it, you might be wondering if you could have done something different to better prepare for a significant disruption in the stock market.
Reasons to do a financial plan
In-depth financial planning is the one of the best ways to ensure you’re on track for success over the long-term. Most simple online calculators only use a static average rate of return to calculate portfolio values, ignoring the variability of returns and the impact a sharp downturn can have on your savings.
For example, the average annualized return for the S&P 500 is roughly 9% between 1980 – 2019. Yet the index only produced a 9% return once during this time. The actual return is typically much higher or considerably lower.
While modeling can’t fully insulate an investor from the impact of ill-timed short-term disruptions or other events (nothing can), a detailed analysis can help investors understand the probability of outcomes by stress testing a financial plan to better assess the likelihood of success over a long-term plan.
Without robust planning and simulations, the simplistic straight-line calculators won’t prepare an investor properly for a downturn in the market or account for the impact volatility has on your assets. Think about it: you wouldn’t put $100 in the stock market expecting to get exactly $130 back in a few years; you realize it could be less than you put in or way more than you thought.
Even if you’ve planned for an inevitable recession or bear market, you may not have considered how the timing of that event could alter your goals. Testing the sequence risk of cash flows—how timing affects the outcome—is another way to help quantify what a 10% or 20% decline in year one of retirement (when you are most vulnerable to a downturn) could do to your plan.
All plans are subject to change
Even the best laid plans can go awry, especially when grappling with short-term volatility or sudden major changes to your financial situation or the economy.
In any data model, assumptions must be made based on a host of unknown inputs. It also isn’t feasible, or frankly useful, to test every single ‘what if’ scenario, just like it isn’t sensible to model a panicked investor deviating from plan and selling to cash when the market was down over 30%. But the planning process helps add layers of protection into the plan. This can provide flexibility to deal with unexpected changes in market conditions or to your financial situation.
No magic bullets
There is no sure-fire way to fully protect your finances to deal with a sudden shock to the markets, but there’s no doubt that diversification and prior planning can help ensure you’re better equipped to manage the change.
Plans that don’t bend, break. Adding conservative assumptions to a financial plan helps provide cushion against unknowns. By its very definition, unknowns can’t be meticulously planned for. But if you give yourself enough of a margin for the uncontrollable, then combined with other adjustments, you can work to control the impact the economy has on your retirement plans.
Controlling your expenses gives you flexibility
Flexibility helps individuals adapt to changing circumstances and can minimize the disruption on your life. In general, high fixed expenses relative to your overall budget can limit your ability to adapt as your investments, goals, or finances change. A strong savings rate relative to your income can help you build reserves before retirement—and during retirement, the focus should be maintaining a reasonable and flexible withdrawal rate relative to your investable assets.
Above all, success in reaching your goals is driven by your spending. ‘When can I retire?’ is a very common question, but many investors don’t realize how much they can control the answer. It’s all about your priorities and what trade-offs you are willing to make between time and dollars. If you bump up the time frame, you either need to accelerate your savings rate or reduce the price tag.
If your accumulated wealth is sizable enough relative to your annual spending needs, then the recent downturn might not have derailed your short-term goals. If your buffer wasn’t as significant, you may need to consider what trade-offs you’re willing to make if retirement can’t be pushed out.
Can you still retire during a recession or ‘crash’ in the stock market?
For the majority of investors, retiring amidst a significant economic event such as the COVID-19 outbreak is not advisable if it can be avoided. For clarity, this is not to say that you can only retire under optimal economic circumstances. But during periods of extreme uncertainty and volatility is usually not the time to make life-changing major financial decisions, again, if you can avoid it.
Many workers are being laid off, furloughed, or perhaps facing a forced early retirement as a result of the virus, so it’s important to recognize that these decisions aren’t always within our control and to ensure you’re financially prepared for an unexpected job loss, particularly later in life.
Your investments deserve more than thoughts and prayers
The best time to prepare for an inevitable downturn in the market is always before one happens. However, there are still actions you can take to ensure your finances are well-positioned to participate in the recovery. While we all hope this is the last time we’re facing a global pandemic, we know this isn’t the last downturn long-term investors will face. We expect the market to go up and down—we can’t control when or why—but we can change how prepared we are for it.
This article was written by Darrow advisor Kristin McKenna, CFP® and originally published by Forbes.