How Market Downturns Impact Retirement | Boldin’s Market Risk Explorer Demo | Office Hours

Hi everybody. Thanks for joining me today and I really appreciate you joining me today. We always appreciate your membership and your engagement here at Bolden. My name is Nancy Gates and I lead the services team here at Bolden. So my focus is on providing support to you, our users and our members through education, coaching and community engagement. My focus today will be our new Market Risk Explorer feature which launched a couple of weeks ago. We tested it out first in our beta program and thanks to all of our members. Great feedback, improved it and made some enhancements and got it ready for our general audience. So I'm really excited to talk to you today about market risk as well as demonstrate this new feature to you. Just some light housekeeping here. I'll start with the presentation followed by a demonstration. After that I'll open the Zoom chat for Q and A. We do have a dedicated intake process for submissions. When we launch a feature in a beta, we release a survey. We've got one in there now for our two beta features. That's a great place to provide feedback. Any other feedback you can submit via the chat button in the bottom right hand corner of the software. Also, I'm not here today to provide specific investment, tax or legal advice. Bear in mind I'm an educator and a coach and so nothing I say should be considered specific investment, tax or legal advice. I'm here to provide general educational information around the financial wellness domain, financial planning domain and the Bolden platform. So we are going to discuss today the Market Risk Explorer, of course, and the impact of market returns downturns on your retirement. Market downturns, especially in early retirement, can seriously impact how long your money lasts. We designed this new explorer to help you evaluate the impact of market risk on your financial future. We're going to discuss, first of all, a couple of ways that market risk impacts a retirement plan. First of all, during retirement you'll be drawing from your portfolio to cover your expenses. If markets decline and you continue to withdraw the same amount, you're forced to sell investments at reduced prices, locking in your losses, negatively impacting your ability to sustain withdrawals and achieve your long term financial goals. Second, your portfolio is typically largest and has the most growth potential early in retirement. If you suffer a market loss early in retirement, that money's gone and retirement withdrawals diminish an already weakened portfolio. Your portfolio base is reduced by both the loss and those withdrawals. You have less capital to benefit from future market rebounds and your portfolio loses its chance to recover. Third, when you're planning for a 30 year retirement, the sequence of market returns is more important than the average return. Two retirees could have the same average market return but vastly different results depending on whether difficult market years occurred early or late in their retirement. We'll see an illustration of this later in today's session. The fourth important effect of market risk is longevity. Experiencing significant market losses early in retirement heightens the risk of depleting your funds as you'll still face many years of withdrawals. It's more challenging to recover from an unfavorable sequence of returns at the beginning of retirement compared to later on when you have fewer withdrawals left. Our Market Risk Explorer features three options and exploring these scenarios as you plan can help you understand how vulnerable your plan is to poor market timing and help you incorporate strategies to protect your portfolio. The first option available in our Market Risk Explorer is a decade of poor returns. This simulates 10 years of weak market performance starting the year you retire. An historical reference for this scenario might be 2000 to 2009, known as the Lost Decade. This is when S&P 500 had a negative total return of about negative 95 annualized with dividends reinvested. The second option available in the Market risk explorer is three years of bad returns. This simulates a sequence of three consecutive years of negative market returns of 15% each year. As I mentioned earlier, over a 30 year retirement, the average return is less critical than the order in which those returns occur to. Retirees with the same average market return can experience vastly different outcomes depending on when the challenging years happen. In this illustration, despite having the same Beginning balance of $100,000, retiree has $70,055 more than retiree B who faces five consecutive down years after retirement. For a historical reference, we can refer again to the Lost decade, which began with three straight losses of 10.1% in 2000, 13% in 2001 and 23.4% in 2002. The third option in the Market Risk Explorer allows you to create your own custom downturn by setting the timing, duration and severity. This allows you to model specific situations you're concerned about, providing a tailored view of how your plan might perform under these conditions. An historical example of a large downturn or bear market is the COVID 19 crash of March 2020 when the S&P fell 34%. These are a few strategies commonly employed to protect against market risk. Diversifying and allocating wisely Maintaining a cash buffer Employing a flexible withdrawal strategy such as a guardrails or Vanguard's dynamic strategy Rebalancing on a Regular basis and of course, avoiding panic and staying the course. These are a couple things you might want to consider in your bolden plan. If the market Risk explorer indicates that market risk has a significant impact on your financial future. If it looks like you're going to be impacted by market downturns, you may want to increase your retirement savings. You can use our contribution feature to do so. You could also adjust your investment strategy using the recommended rates. Our new recommended rates released last March, facilitate easy adjustments to your asset allocation. So you could go from aggressive or moderately aggressive to moderate. For example, you could also position your lower risk assets, so those would be your cash and savings accounts for early retirement years. You would use the custom withdrawal strategy to manage the withdrawal order in your plan as opposed to leaving your plan set on the traditional withdrawal order. You could adjust your spending by selecting a must spend like to spend budget setup in our detailed budgeter. A must spend budget allows you to create that basic non discretionary budget. So if we faced a downturn, those might be the items that you pulled back to your food, transportation, housing, healthcare, et cetera. Those essentials. And in a market downturn or another type of risky period, you might forego the more non discretionary items. The more discretionary items, sorry, such as travel and hobbies. Finally, you can use our retirement age feature to learn how adjusting your retirement date can improve your chance of success during market downturns as well as potentially adjusting that other lever we're also familiar with, which is the Social Security claiming age. So I'm going to move into the software now to demonstrate the new feature. This is our case study here. Mark and Martina. They are 60 and 58 and this is their baseline plan. Current net worth almost $2 million. Projected net worth in future dollars at longevity age almost $10 million. Just to validate our assumptions, we're looking through the future dollars projection and average inflation and returns. Retirement ages as I said, 65 for each spending needs, withdrawal strategy and basic budgeter. Let's take a look at their current portfolio and modeled rates of return. We see that Mark's 401k has a rate of return of 8.08%. So does his rollover Ira Roth. 401k is more aggressive as some people do position their Roth to a higher percentage of equities. Thomas's 529 is conservative. He's going to college in a year or two. They don't want to lose any of that hard earned saved money for his education. The brokerage account has an aggressive rate of return and the emergency Savings has a savings 2% average rate of return. Their chance of success is 76% in this scenario, meaning 24% of the time they might need to make some adjustments. Let's navigate to Explorers Market Risk Explorer and see the impact of how market risk might impact their plan as well as how to utilize this. The first thing you'll note is that you have the ability to include and exclude different accounts on the left panel. Most of us aren't worried about our emergency savings being impacted by a poor market, so you have the ability to select deselect any accounts here that you don't want impacted by the three models. Note that the Explorer, like the Monte Carlo Explorer, always runs on average assumptions regardless of whether you're toggled to optimistic or pessimistic in your plan. As I said, we have three options available a decade of poor return. So this is more of a canned option. You don't have to do a lot of thinking here. Look at historical references or anything. We'll select a decade of poor returns. This is our retirement age when the downturn starts indicated by the orange dot and then the green plot line is the impact of this decade of poor returns on the savings plan. We end up with negative $1.02 million. Should we face 10 years of low returns? What happens if we face a three year sequence of bad returns? Negative 15% for three years? Well, our losses double. We're 2.03 million. Our chance of success is 17. Our chance of success here is 36. Not great. Then we can also create a custom downturn. In this one I've got one year of 20% that would bring the chance of success to 58% and state value at longevity age is still positive. As I said, there are a number of levers you can utilize in your plan to adjust this. Let me show you how you would model these particular scenarios in your plan. If you want to model a market drop, you would navigate to expenses and healthcare and add a disbursement. I would mark it as deductible. Because we can't apply the Market Risk Explorer scenario to the plan, we can come back into the plan and play out a what if. What if I lost $300,000 at age 65 or retirement age? Press save note. The plan update meter in the upper right hand corner will indicate the change to savings age estate value at 94 or longevity age lifetime taxes. Then we navigate back to the overview and see the chance of Success went from 78 to 64%. I Have a detailed budgeter set up in this plan. So if I toggle back to the must spend budgeter, my chance of success goes up to 99%. So as I said, there are different ways to leverage the different features of the software to protect against particular risks. The must spend like to spend budgeter is one of the best levers you have because you can use it to separate out the non discretionary expenses that you would fall back upon in for example a bad market and leave those more discretionary travel, hobbies, gifting, etc. Set them aside during a period of risk. Question should changes be made in a baseline plan? No, I always recommend keeping your baseline as kind of your plan of record, making a copy of it and then putting any change in there. I. I also only like to make one change per scenario. So I wouldn't go in a scenario and put in a retire early relocate, market risk, Roth conversion all in one. Some people like to do that. I'm more of a minimalist but I I always recommend exploring Roth conversions, market downturns, etc in an alternate scenario. I want to show you also the method. Let me finish the conversation about the market downturn. So for the market downturn here we have a $300,000 disbursement. We haven't modeled in any recovery. Note the Market Risk Explorer does not have a programmed recovery. We just go back to your selected rates of return and future changes to rates of return. There's no program recovery, there's no historical model here. We have a decade of poor returns. We have three years sequence of bad returns. There's no historical model here or in our Monte Carlo. If you want to model a recovery in this scenario with your $300,000 market drop perhaps 3, 4, 5 years, you could go to income and add a windfall back into the plan. If you want to model a sequence of poor returns, what I typically do, it's not great if you're years off from retirement. But what I like to do is let's say Mark was retiring this year or next year. What I would do is I would set his current rate of return to zero. Remember we can't go negative here. And then I would add a future rate of return. To whatever my expectation might be. If you want to get more granular than that for one specific account, changing rates multiple times, you could transfer the entire balance to a placeholder account and change the rate of return on that. It really depends on how granular you want to get. Our Market Risk Explorer is a non granular feature allowing you to simply explore. If you want to get really granular, these are a couple ways you can do that in your plan. So I think that's all I wanted to explain, discuss, demonstrate today. So thank you very much everyone for joining me today. We always appreciate your membership, your support and your engagement. So I hope you enjoy the market Risk Explorer. Any questions, please send us a message. Thanks for joining me and I'll see you soon. Happy planning.