Volatility and the impact on retirement savings

Traders work on the floor of the New York Stock Exchange (NYSE) in New York, U.S., October 13, 2017. REUTERS/Brendan McDermid

A new Allianz Life study has found even though  Americans seem more comfortable with market volatility,  over half surveyed are concerned about the effects the constant swings can have on their retirement security. 

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“As market volatility becomes a more constant part of our financial landscape, Americans are recognizing the value of options that provide both opportunity and a level of protection,” says Paul Kelash, vice president of Consumer Insights for Allianz Life Insurance Company of North America.  “Because we can’t be certain when the next major downturn will occur, it’s important that people have the ability to grow their retirement savings while still safeguarding their financial future.”

Kelash discussed with Fox Business what the current mindset is about market performance and the concern about retirement savings should the market experience a significant drop. 

Boomer:  Why do you think people are reacting to market volatility the way they are?

Kelash:  Although market volatility – as measured by the Cboe Volatility Index or VIX – has been much more dynamic this year than the low levels seen throughout 2017, many Americans seem to have psychologically come to terms with it. According to Allianz Life’s 2018 Market Perceptions Study (https://www.allianzlife.com/about/news-and-events/news-releases/Though-More-Comfortable-with-Volatility-Americans-Still-Lean-Toward-Protecting-Retirement-Savings) , more than a third (35%) of Americans said they are comfortable with current market conditions, up from 26% in 2015.

We think this is due in large part to the volatile political and economic news cycle this year. People seem to be numb to recent news events that likely would have caused significant anxiety only a few years ago. As a result, they are not making any emotional, news-driven decisions with their portfolios, which is generally a positive development.


In fact, we found that 65% of people surveyed are not considering taking any action with their portfolios due to short term volatility, including moving money from stocks to cash or pulling back on their investments.

Boomer:  Does this comfort with short-term market volatility extend to Americans’ feelings about their financial future?

Kelash:  Despite their feelings in the short-term, volatility still matters. While we see some increasing comfort with volatility, it is driving a simmering anxiety in many Americans – especially as it concerns their retirement savings. More than one third of respondents admit recent volatility is making them anxious about their nest egg and a similar number (38%) said that if the market experienced a significant drop causing them to lose a lot of money, there is no way they could rebuild their savings in time for retirement.

Furthermore, many people are worried that current market volatility is a warning sign about more substantial trouble right around the corner. A significant number of Americans still fear a big market crash (42%) or a major recession on the horizon (44%). As a result, interest in financial products that offer a balance of growth potential and protection is growing.

Boomer:  What actions should those younger Baby Boomers who are 5 – 10 years from the start of retirement be taking?

Kelash:  Boomers who are 5-10 years from the start of retirement should be thinking about how they scale back on asset accumulation and keeping money in risky assets and focus more on financial options to protect their assets from market gyrations. However, we know many boomers still need to add to their retirement savings and grow their portfolios. They need to know there are solutions that can offer both protection from market downturns and some growth potential.

People seem to be ready for this shift. When asked about their retirement planning, 57% of Americans said they are willing to give up some potential gains for a product that protects a portion of their retirement savings, up from 48% in 2015. Furthermore, when asked about important actions to take 5-10 years before the start of retirement to help make sure they have a more secure retirement, nearly a third (31%) chose “putting some of my money into a financial product that offers a balance of potential growth (up to 10%) and some level of protection (no loss of money if the market goes down 10%).”

New innovations in retirement products – particularly certain annuity types, which also provide guaranteed income in retirement – are available and should be considered by boomers who are concerned about the potential effects of market volatility.

Boomer:  With the uncertainty of the market, how can boomers grow their retirement savings while still safeguarding their financial future?

Kelash:  No one knows when the next major downturn will occur, so it’s important that people have a balance going forward. First, boomers should take a close look at their portfolios and determine the right level of risk for their age and financial situation. Has that risk profile changed? Next, make diversification a priority and consider financial vehicles that offer flexibility such as the opportunity for growth balanced with protection against market downturns. If boomers are not certain where to turn for such options, a financial professional can help navigate the marketplace and determine the right mix of financial products.

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