Retirement Investing in Challenging Times
To many people, it wasn’t exactly news, but early this past December, we received official word that the U.S. has been in a recession since December 2007. Putting aside discussions of exactly when the U.S. landed in this mess, we’re clearly mired in a protracted period of market volatility and uncertainty.
If you’re like most retirement investors, your natural reaction is a nagging and fear-based desire to immediately do something – anything – to protect your retirement portfolio. But a reflexive reaction could do serious harm to your portfolio’s long-term health.
So, what now? At Grand Wealth Management, we recommend that you take a deep breath and pause for some perspective, focusing on the following four guidelines.
1. Don’t Let Panic Cause You to Tilt Too Much Toward Cash
Even as equity markets remain in tatters around you, resist the natural urge to move all or most of your nest egg out of equities and into the relative safety of cash investments. Generally, while you might like to keep a small part of your portfolio in cash regardless of what’s happening in equity markets, you should not allow cash to play a starring role in your investment strategy for retirement. Over long terms, cash investments have historically produced poor returns compared with other asset classes.
Also, while cash investments do pose little market risk, they’re uniquely vulnerable to a different kind of risk – inflation. The returns you receive on cash investments could well be topped by the inflation rate, and when this occurs, your nest egg will lose at least some of its purchasing power. So think carefully about the likelihood of a cash-heavy portfolio achieving your objectives for retirement investing.
2. Know Your Time Horizon
In good times and bad, your asset allocation for retirement should be based to a large degree on your time horizon for retirement. Whenever you have a time horizon of seven or more years for retirement or any other goal, you can afford to have a larger equity allocation, because you have enough time to capture the long-term gains associated with equities. For a shorter time horizon, you should keep at least part of your portfolio in more conservative investments, like cash and certain fixed-income investments.
Keep in mind that when you’re investing for retirement, your time horizon is always the rest of your life. So, even if you plan to retire within a few years or you’ve already reached that life stage, your approach to retirement investing should recognize the realities of life expectancy. Here’s one such reality to reflect upon: at age 65, the average life expectancy is nearly 19 years, according to the National Center for Health Statistics. As a near-retiree or current retiree, plan to always have enough cash or cash equivalents in your portfolio to cover your living expenses for the next 12 months, minus any expected income from Social Security, a pension or any other reliable source outside your portfolio. The remainder of your portfolio should be allocated between equities and fixed-income investments based on your life expectancy, specific goals for the rest of your life, return objectives and risk tolerance.
3. Map Out Withdrawals Carefully
If you’re currently retired and tapping your portfolio, or you hope to retire soon, now is a good time to review or plan your withdrawals. As a rule of thumb, we recommend a 4% withdrawal rate during your first year of retirement, with inflation-based increases in the dollar amount you withdraw each year after that. According to projections we’ve seen, if you follow this plan, your portfolio should last about thirty years.
If you’re currently withdrawing at an annual rate greater than what we’ve laid out, bear in mind that especially during down periods, excessive withdrawals from equities could leave that portion of your portfolio less capable of staging a comeback when markets rebound. Consider withdrawing from cash or fixed income instead – or perhaps look at the feasibility of trimming your living expenses.
4. Most Importantly, Stay Focused on the Big Picture
In a recent survey conducted by the Family Planning Association and Ameriprise Financial Services, 88% of individuals working with a financial advisor on a comprehensive plan felt they had a clear direction. And clients following such a plan had a 50% higher comfort level than respondents without a plan.
So make sure you have an overall strategy for retirement investing as well as for how and when you will use the proceeds from your portfolio. Revisiting your plan when your life circumstances or financial markets change can help you decide whether any adjustments are needed to keep your plan on track.