EDITOR'S NOTE: This article was originally published in the March 2008 issue of Kiplinger's Retirement Report. To subscribe, click here.
Fresh retirees and those nearing retirement may well be keeping one eye on the stock market and the other turned toward the heavens, wondering why they're being tested like Job. The turmoil in the markets certainly causes suffering for all investors, but none more so than those who have started or are about to start tapping their portfolios for a lifetime of income.
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A downturn just as you're about to reverse gears can seriously chew up your nest egg. If your $1 million portfolio suddenly plummets to $800,000, your carefully planned 4% annual withdrawal of $40,000 is squeezed to just $32,000. There goes that long-awaited trip to Rome.
Ask anyone who retired as the dot-com bubble burst: It's very difficult to regain your losses if you begin to draw on investments as the roller coaster takes a downward plunge. If you're about to reach for the antacids, hold off. For soon-to-be and recent retirees, there are some strategies you can employ that will make the roller-coaster ride a little less heart-stopping.
Our first piece of advice: Don't panic. Take a hard look at your asset allocation, cash flow and spending. But don't abandon the stock market -- selling off at a low point -- and move into cash or bonds, which are not exactly going gangbusters either.
"You don't want to be out of the market, and you don't want to time the market," says Philip Lee, a certified financial planner with Back Bay Financial Group, in Boston. Lee recalls one client who moved entirely into cash during the market swoon of 2001-02. "He missed participating in the market upswing of '03 and '04," says Lee.
Paul Rippas, 58, a vice-president of a distribution company who lives in Branchburg, N.J., and is a couple of years from retiring, is "sitting tight" when it comes to the market. His wife, Janice, 62, has retired from her teaching job. Last year, Rippas hired a financial planner, who rearranged his portfolio, and he'll ask the planner to crunch the numbers in two years to make sure he's ready to retire.
Even with the market uncertainty, Rippas is confident that he and Janice will have enough from her pension, his 401(k), a Roth IRA and Social Security. "I've done due diligence and feel I'm on the right track," he says. "I've been down the road before, panicking and trying to get out, and that doesn't work." The message is clear: If you have a well-diversified portfolio going into a down market, there's no reason to shake things up. If you don't, this is a wake-up call.
Postpone Tapping Your Stocks
Even if you've already retired, you could be in better shape than you think. Many advisers suggest having a cash reserve, to protect you from having to dip into stock during a slowdown. Beyond such a reserve, you may have enough from pensions, Social Security, annuity payments, bond interest and dividends to cover a good part of your expenses.
If you need to raise income by selling some stocks, review your asset allocations. Market swings may have thrown your allocations out of whack. You should sell stocks in the asset categories in which you are now overinvested. When you rebalance your portfolio, you may need to shop for stocks for underinvested categories. The beauty is that such rebalancing often means selling high and buying low.
Indeed, this may be a great time to look for solid, blue-chip stocks. "In times like we're in now, the companies that tend to perform better are large companies versus small and midsize companies," says Mark Johannessen, president of the Financial Planning Association and a certified financial planner with Harris SBSB, in McLean, Va. "Those that also seem to weather the storm that we're in right now are growth companies rather than value companies."
Other advisers warn investors not to get too hung up on trying to predict which asset classes -- large company versus small company, domestic versus foreign -- to buy or sell. "This is more about creating balance and not trying to cherry-pick short-term investment strategies," says Troy Von Haefen, a certified financial planner in Nashville.