Susan Dziubinski: This year's downturn in the U.S. stock market has been nerve-racking for all types of retirement investors—people accumulating assets for retirement, those approaching retirement, and those who are already retired. Joining me to discuss how to ensure that the market crisis doesn't do a number on your retirement plan is Christine Benz. Christine is Morningstar's director of personal finance and retirement planning.
Hi, Christine. Thank you for being here today.
Christine Benz: Hi, Susan. Great to see you.
Dziubinski: Let's sort of take this group by group. So, for those investors who are, say, maybe under 50 years old, are still in the accumulation phase of saving for retirement, what steps should they be taking to ensure that this bearish market doesn't knock their plan off track?
Benz: Right. It's counterintuitive because for this group I worry about them the least because they are many years from retirement. But this is probably their first bear market for many of these folks. They may have been investing during the 2007 through 2009 period, but many of the newer investors were not. And so, I think that these early bear markets early in your investment career can be incredibly nerve-racking. They can be psychologically really difficult.
I think the key thing to think about is control, what levers do I control—and the main one at this life stage is your contribution rate. That is going to be the main determinant of your plan's success or failure. And the good news about down markets is that with the same contribution rate you can buy more shares than you could have when the market was more elevated. So, I would focus on that contribution rate, see if you can't find room in your budget to potentially even lift your contribution rate, and then also check your asset allocation and make sure that you have a plan for rebalancing back to that target asset allocation. A target-date fund is a good tool, I think, for keeping your portfolio's asset allocation on track on an ongoing basis, because part and parcel of such a fund is that that rebalancing is built in. If you're not using an all-in-one product like that, just make sure that you have a system for rebalancing. And rebalancing basically means that you're stepping up your exposure to the asset classes that have dropped. For most portfolios, stocks have dropped the most, recently.
Dziubinski: Christine, what about that group of investors who are getting closer to retirement? What steps should they be taking today?
Benz: Well, contribution rates are super important for people at this life stage, too, because they will be retired for many years. So, those additional contributions that they make today can still compound and make a difference in the health of their plans. So, they, too, should be looking at whether they can bump up their contribution rates. Then turn your attention to your asset allocation. At this life stage, if you're in your 50s or early 60s with retirement on the horizon, you generally want to be looking for balance in your retirement portfolio. So, you absolutely need stocks for long-term growth, but you also need some safer investments in your portfolio. So, you want high-quality short and intermediate-term bonds. If retirement is very close at hand, I don't think it's too early to start building up some cash reserves. So, "balance," I think, should be your watchword with respect to your asset allocation at this life stage.
Dziubinski: And you also say that if retirement is closer on the horizon rather than further away that you need to start putting some details around your retirement plan at this point. What do you mean by that?
Benz: Right. I think it's time to get serious about forecasting your total income needs. And if retirement is quite close at hand, you should be fairly clear on how your living situation might change if you're planning to relocate or buy a second home or whatever it might be. So, do some work on what your budget might be. I like the idea of even mapping it out for several years, even a couple of decades where you're plotting, "Well, in this year, I think, we'll need a new roof; in this year, I think, we'll need to buy a new car"—whatever it might be. Move those lumpy outlays into your forecasted spending. From there, you can look at how much of those income needs will come from nonportfolio income sources—so, Social Security, a pension if you're lucky enough to have one, if you're someone who owns rental properties, you're getting income from those. Look at all those nonportfolio income sources. Subtracting them from your total income needs will give you a lens onto your anticipated withdrawal rate in retirement, and I think you want to give some thought to whether that's viable. Our team at Morningstar, as well as some other researchers, have looked at withdrawal rates. The name of the game, especially in down markets, is to think about being a little bit conservative, especially if you are about to retire into what looks like a difficult market environment.
Dziubinski: Let's talk about the people who are already retired. These people are drawing from their portfolios already. Now, of course, this type of market can be the most nerve-racking of all for these investors, right?
Benz: That's right. So, for them, they want to focus on what they can control. Withdrawal rates would be somewhat within their control. A lot of the research that I referenced points to the value of being variable if you can with your withdrawals. So, that means that in really good markets like we had from 2019 through 2021, you could potentially take more from your portfolio. The trade-off is that when things are down as they are today, if you can potentially take less, that is something that can be hugely advantageous to your plan. On the other hand, it's also a heavy lift given what we're seeing from an inflationary standpoint. So, look at that withdrawal rate. You want to look back on the full year really to assess the viability of your withdrawal rate. Also, look at your asset allocation and your subasset allocation, and be thoughtful about where you're going for those withdrawals, so not just how much you're taking out but also where you're going for the withdrawals. I like the idea of retirees holding some cash, some high-quality short-term bonds on an ongoing basis to help meet those income needs on an ongoing basis. I think that that's the linchpin of a Bucket-type strategy. That's a good starting point when thinking about how to structure your in-retirement portfolio.
And finally, I would say, for people at this life stage, I think it can be super tempting to move into this mode where you're really paying a lot of attention to the market, where you're watching a lot of CNBC, you're checking Morningstar.com throughout the day. Don't do that. For your own mental health, really stick with whatever plan that you have for monitoring your portfolio. We've got good articles on the site, but don't spend time monitoring your portfolio balance, because I think that can get you into a negative cycle where perhaps you're inclined to make changes that otherwise you probably shouldn't make.
Dziubinski: Christine, thank you so much for your time today and your perspective during what's a very interesting time in the markets and for those of us saving for retirement and those of us who are in it. We appreciate it.
Benz: Thank you so much, Susan.
Dziubinski: I'm Susan Dziubinski with Morningstar. Thanks for tuning in.