Navigating Retirement Savings During Market Volatility

Market turbulence returned on Tuesday when inflation rose by 0.3% over the previous month and 3.1% over the past year, figures higher than economists' expectations. This caused the S&P 500 (^GSPC) to drop by 1.4%, the Nasdaq Composite (^IXIC) by 1.8%, moving away from their recent peaks. However, the stocks regained momentum with the S&P 500 gaining 0.96% on Wednesday, and the Dow Jones Industrial Average (^DJI) adding 0.4%.

The recent rollercoaster of performance poses a question: in the face of potential sustained inflation that may prolong interest rate cuts by the Federal Reserve, should retirement-targeted holdings be adjusted in any way?

As Morningstar’s Director of Personal Finance Christine Benz puts it, investors must navigate a fine balance. While it is tempting to react to market volatility, complacency can also emerge in light of the strong market performance over the past 15 years. Benz suggests that investors, particularly retirees, periodically review their asset allocations. For instance, a portfolio that was 60% stocks and 40% bonds in 2019 could've shifted to 70% stocks and 30% bonds by 2023 due to the ascend in stock value.

Rebalancing or adjusting the mix of stocks and bonds in a portfolio is crucial when they diverge by 7% to 10% from the original asset allocation. Marguerita M. Cheng, a certified financial planner and CEO at Blue Ocean Global Wealth, warns against hasty decisions during market fluctuations as timing the market is notoriously challenging.

Cheng advises that automatic contributions to retirement plans help in achieving stable investment performance over time. She also highlighted the role of fund managers in adjusting and rebalancing static asset allocation funds and target-date funds. Those funds will automatically transfer to safer assets as the estimated retirement year approaches.

The key concern is to ensure diversification in your portfolio in terms of cash, stocks, bonds, and stock and bond funds. This doesn't mean selling everything, but chipping away enough to maintain a 60/40 portfolio, ensuring a balanced risk tolerance and risk capacity.

If you're concerned about a potential market downturn nearing retirement, it may make sense to rebalance your retirement portfolio. Having some cash and taking profits from stock appreciation could protect you from having to sell stocks during a dip.

Fixed income investments, such as Treasury securities and CDs, are currently attractive due to high interest rates. Ken Tumin, a senior industry analyst at LendingTree, suggests that it might be a good time to move high-risk assets into these low-risk investments.

Some certificates of deposit and high-yield savings accounts are currently providing more than 5% returns, with the best CD rates offered primarily by online banks hitting over 5.5%.

All these experts share the sentiment that careful consideration should be utilized over impulsive reaction when it comes to managing retirement accounts during periods of inflation. It never hurts to ensure your retirement savings are optimized to meet your long-term needs and well-aligned with your risk tolerance.