“As this conflict escalates, it is likely to weigh more and more on the stock market and the economy,” The Washington Post’s Heather Long wrote earlier this month.
Despite the market turbulence, here’s the standard advice for investors: Don’t panic. If you have a long time before you need to start using the money in your retirement account, stay the course.
Generally, financial advisers recommend that you ignore short-term market activity if you won’t need your retirement money for another 10, 20 or 30 years.
But what if you need your money now?
“No one ever addresses directly, in depth, the concerns of people 65 plus who are already in retirement and what they should do in this volatile economic environment while the country has an erratic leader,” one reader wrote.
Actually, the media has addressed their fears. And I have as well.
But I understand. People don’t want generic advice. They want to know what to do with their money. However, it’s not possible to tell you specifically what to do with your retirement account without knowing your full financial situation, which would include information about all your income, risk tolerance, and monthly expenses and/or debts. And, despite being retired or close to retirement, the advice is, for the most part, the same: Don’t panic — that is if you have a plan.
Still, I get that you are scared. So I asked three financial experts to go a bit deeper to answer five questions that cover the major concerns expressed by retirees and folks close to retirement.
— Dan Egan, the director of behavioral finance and investing at online financial adviser Betterment.
— Carolyn McClanahan, a physician turned certified financial planner who founded the fee-only Life Planning Partners based in Jacksonville, Fla. McClanahan also co-founded Whealthcare Planning, an online tool that helps people plan for the costs of aging and protect themselves from financial fraud and abuse.
— Ric Edelman, co-founder, Edelman Financial Engines, host of a weekly radio show and author of “The Truth About Your Future: The Money Guide You Need Now, Later, and Much Later.”
Here are your questions and their answers:
Q: What is the best investment mix if retired or close to retiring?
Egan: There are many ways to manage risk. Here are two ways:
- Glidepath: Our general advice is that with investing goals that are far out (think a few decades away), you can afford to take more risk with your investments. But as your goals get closer, you should steadily decrease that risk. At Betterment, we call this a “glidepath.” For someone who is one to two years away from retirement, we generally recommend no more than 60 percent stocks. That means only 60 percent of your retirement portfolio is exposed to the volatile stock market, and 40 percent is invested in high-grade bonds that can provide stability in your portfolio. Once you’re retired, you should continue de-risking for about 10 years, until you’re at 30 percent stocks.
- Bucket approach: Another common approach to manage risk as you approach retirement is to create different “buckets” of money. As an example, you could create:
1. A short-term bucket that is invested in safe cash equivalents or high-grade bonds, and this bucket may have enough money to provide for the next three years of spending. This will try to make sure you don’t need to withdraw money from stocks when they are at a loss during a market downturn.
2. The second bucket is your long-term bucket and consists of more aggressive investments such as 60 percent stocks. This will provide growth for your future spending needs that need growth to keep pace with inflation, and that you don’t need to sell during a drawdown. Just replenish the short-term bucket with long-term money each year.
McClanahan: Hopefully you have some basic projections that show you have enough money to support your needs through your lifetime. If you are cutting it close to having enough, you should be conservatively invested early in retirement because you can’t take the risk of losing a lot of money. We generally recommend 50 percent to 70 percent fixed income in this situation. If you have plenty of money and can afford to take more risk, you can increase your allocation to equities. However, if the thought of potentially losing a lot of money doesn’t sit well with you, you should consider staying conservatively invested.
In reality, the economic environment should not drive your investment allocation at all. How much you spend and your psychological and financial ability to handle loss should be the driving factors in how your accounts are invested. Creating an investment policy that spells out in advance how much you will allocate to equities and fixed income is the best way to avoid the emotional mistake of selling out when the markets go crazy. Consider hiring an hourly fee-only financial planner to help you create an investment policy that is right for you.
Edelman: Don’t try to build an investment strategy based on the current market or economic conditions — because they always change. Instead, focus on your long-term goals. If you’re retired, you want to know that you’ll be able to continue receiving enough income to maintain your lifestyle for the rest of your life. That’s 20, 30 or even 40 years. Today’s economy is a mere snapshot in a long movie. So obtain a portfolio that provides you with a diverse array of asset classes and market sectors (there are 16 of them) and hold onto this throughout your retirement. If you don’t know how to build that portfolio, talk to a financial adviser.
Q: I'm already retired. Should I move my money to bonds?
Egan: Of course, I’d need to know more about your specific financial situation to give you a specific answer. But we generally recommend retirees have between 40 percent to 70 percent of their retirement portfolio invested in bonds. In retirement, you are actively withdrawing money from your portfolio, which puts you much more at risk to market downturns than someone who is in the accumulation phase. Bonds provide stability to your wealth. In fact, the often-cited 4 percent rule of safe retirement withdrawals assumed a portfolio built of 40 percent bonds. Just to be clear, what drives the allocation to bonds is your age/risk tolerance level, not a recent state of the market.
Read more about withdrawing your money in retirement:
McClanahan: You should absolutely have money in bonds. A 100 percent equity portfolio in retirement would give most people nightmares during turbulent times. In reality, the economic environment should not drive your investment allocation at all. How much you spend and your psychological and financial ability to handle loss should be the driving factors in how your accounts are invested. Creating an investment policy that spells out in advance how much you will allocate to equities and fixed income is the best way to avoid the emotional mistake of selling out when the markets go crazy. Consider hiring an hourly fee-only financial planner to help you create an investment policy that is right for you.
Edelman: Your question suggests that you don’t have money in bonds already, and that therefore all your money is in stocks. A 100 percent stock portfolio is risky, and for this reason, it makes sense to diversify — to reduce your market risk. But interest rates are now very low, and as rates rise in the future, bond prices will fall. Therefore, as you move some of your money to bonds, you should emphasize short-term (one- to three-year maturities) and intermediate-term bonds (three to seven years) rather than long-term bonds (10 to 30 years) — because the longer the maturity, the more money they’ll lose when rates rise.
Q: I keep hearing that I should have enough cash to last a few years and leave the rest of my retirement money in the market even during a recession or economic downturn. Is that a good rule of thumb?
Egan: Most people should have an emergency fund of between three and 12 months of spending for unexpected expenses. Aside from your emergency fund, you should generally have a portion of your investment portfolio invested in both stocks and bonds. The ratio of stocks to bonds will depend on your goals, time horizon and risk tolerance. Recessions and market downturns will happen, and your portfolio will fluctuate. That is to be expected with investing, and you should:
- Make sure you understand the risk of your portfolio beforehand so you are prepared for when a downturn does happen.
- Have some money set aside to help you weather the storms.
McClanahan: In retirement, two years of cash in money markets and CDs is a good rule of thumb. The rest of your portfolio should be invested in a mix of stocks and bonds depending on the amount of risk you can take both financially and psychologically.
Edelman: It’s wise to maintain ample cash reserves — a rainy-day fund, so to speak. We recommend three to 24 months’ worth of spending, depending on your current sources of income. For example, if you’re married, retired, with both of you receiving Social Security and pensions, three months of cash reserves might be plenty. But if you’re the sole wage earner in your household and your income fluctuates or is unpredictable, two years’ worth of cash reserves might be better for you. By having plenty in reserves, you won’t have to liquidate your stocks, bonds, mutual funds or retirement accounts in the event of an unexpected major repair bill, health emergency, job loss or other significant financial event. Without ample cash reserves, you’d have to sell those assets — and with your bad luck, you’d have to do so right in the middle of a market crash, while prices are low. Having lots of cash reserves avoids this problem for you.
Q: I am retiring in less than a year. I agree that to pull all of my money out of my 403(b) fund, which is weighted toward stocks, would be foolish, but I also believe that the market is overheated and that recent governmental policies are moving us toward a recession. Should I reduce my exposure to stocks? And if so, what percentage in equities should I have in my retirement account?
Egan: For someone who is one to two years away from retirement, we generally recommend no more than 60 percent stocks. In this case, 60 percent of your retirement portfolio is exposed to the market volatility, and 40 percent is invested in high-grade bonds that can provide increased stability in your portfolio. I generally think the biggest risk to retirement investors isn’t the market; it’s their reaction to the market. If the market dropped 20 percent and then recovered in a year the issue isn’t the returns, it’s whether you sold after it crashed, but before it recovered. So I’d recommend investing in whatever level of stocks means you are comfortable that even if the market dropped, it wouldn’t stress you enough that you’d change anything.
McClanahan: You can invest in bonds within your 403(b) and if you are close to retirement, you should definitely have a significant exposure to fixed income.
Edelman: It’s not a question of whether there will be a recession — because, eventually, there will be one — but what happens AFTER the recession. You’re going to live for 30-plus more years; recessions occur on average every four years. So you can expect to experience seven or eight more recessions over the rest of your life. Guess what happened after every prior recession? The economy grew and the stock market reached new highs. It’s reasonable to expect that to happen next time, too, and the time after that and the time after that. So don’t be quick to change your strategy because of fears of a recession. Instead, make sure you’ll be able to generate the income you need during the recession without major changes in your investment portfolio. With that in place, you can simply wait for the recession to come, and then end — just like a storm, they never last forever.
Q: Should I buy an annuity?
Egan: The annuity question is one for a financial planner who can look at the costs and benefits for your specific situation. Make sure you get an independent certified financial planner who isn't getting paid by the annuity company.
McClanahan: There are different types of annuities, and buying a plain vanilla immediate fixed annuity can provide income for your lifetime that won’t be subject to market fluctuations. It is good to consult with a fee-only financial planner to decide if this is right for you. Ideally choose an hourly planner as they can provide objective advice on the annuity.
Edelman: Absolutely not. A recession isn’t certain, might not occur for two years, and when it does will probably last less than a year (the average recession since 1945 lasted only 10 months). Buying an annuity, by contrast, is an irrevocable decision — once purchased, you’re stuck with it (because there are adverse tax implications, surrender charges and potentially IRS penalties as well). And when I say “stuck with it,” I’m referring to the fact that the income provided by the annuity is low; that the income never rises, meaning inflation will erode the value of that income over time; that once you start receiving your income, you’ll never have access to your principal again. All you can have is the monthly check; when you die, the income stops. There is nothing left for your spouse or children; and if the insurance company defaults, the income you’re getting could be reduced sharply or even ended. So, no, absolutely do not move your money into an annuity merely because of recession fears.
As you can see, some of the answers vary, which is why if you don’t have a clear retirement strategy, get one. Work on a plan that works for you.
Retirement Rants and Raves
I’m interested in your experiences or concerns about retirement or aging. What do you like about retirement? What came as a surprise?
If you haven’t retired yet, what concerns you financially?
You can rant or rave. This space is yours. It’s a chance for you to express what’s on your mind. Send your comments to email@example.com. Please include your name, city and state. In the subject line put “Retirement Rants and Raves.”
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