There’s no doubt that earlier this year, many retirees I met with were in panic after the government shutdown. Even worse, economists have been warning the country could sink into a full-on recession before too long. With the recent swings in the Dow Jones, S&P 500 and Nasdaq, it’s more than enough to cause anxiety to retirees who rely on their portfolios to sustain them once they stop working.
How can someone who’s approaching retirement, or is already retired, better handle the nextfinancial crisis?
Although many might say the economy is going through a healthy pullback, there is no doubt that another financial crisis will come at some point. Be sure to avoid making the same mistakes so many retirees did in 2008.
Don’t try to time the market
You’ll hear advice from all sorts of financial “gurus” to buy when the market is in turmoil, but that doesn’t mean you should try to pick the spot where the market is at its lowest. Most retirees are really bad at timing the market. Even portfolio managers don’t always make great decisions, and some generate results that are worse than passive investing.
Not only did many investors sell off more than they should several years ago when stocks were on the skids, but most retirees waited too long to get back in when the worst was over — missing the gains the bull market eventually delivered. If retirees had just stayed put, they would’ve continued to earn money in dividends and locked in some healthy capital appreciation.
Trying to correct your risk exposure during a decline can be disastrous, because you’re essentially trying to time the market, and that is gambling with investments. When the stock market is crashing and crowds of people are rushing to sell, that’s when real buying opportunities show up.
Don’t lock into long-term bonds
If you haven’t already, sooner or later you’ll hear about the inverted yield curve. This happens when interest rates on short-term bonds are higher than those on long-term bonds. At this point, it would be tragic to lock up your retirement accounts into a 30-year bond when interest rates will eventually rise in the future.
And the worst part is when portfolio managers purchase bond funds that may be structured to have more long-term bonds versus short-term bonds. With this, it’s almost certain that in case you need to sell off the long-term bonds, you’ll lose part of the original principal, since bond values have an inverse relationship with interest rates — meaning that when one goes up, the other tends to go down.
Don’t load up on stocks
As retirees have noticed that their portfolios are well short of what is needed to sustain income during retirement, many might have dramatically increased their level of risk by filling their portfolios with stocks and stock-based mutual funds.
Recently, I met with a retiree who had over 70% of her portfolio in stocks. The worst part was that she had a conservative risk profile, and a correction would be devastating for her. Most likely, there are many people like her taking on too much risk who could be in trouble if the bull market gains end.
It’s pertinent to keep your allocations appropriate, even if you’re behind on savings. Taking on immense risk isn’t always going to produce an equal-sized reward. You need to recognize that by taking on too much risk, you’ll no longer have any working years to recover from significant losses either prior to or in retirement.
Don’t hoard cash
You’re probably thinking that retirees have seen enough to be emotionally stable about weathering a crisis, right? But that’s far from true. Markets tend to go down more than they should because panic sets in. Anybody actively investing in 2008 probably remembers hearing about all the retirees who sold out in fear — locking in losses — as they watched their resources shrink.
Holding onto too much cash while anxiously awaiting the next market crash is another mistake retirees often make. The problem is the older you get, the more you're likely to rely on dividends and interest to grow your balance. Cash provides neither of those benefits and has to be used to create any sort of growth.
The worst part is by having too much cash, you’re actually losing buying power every year, because inflation erodes the value of your dollar.
What to do instead: Diversify with the right annuity
Diversification doesn’t mean to just diversify into stocks, bonds, mutual funds or ETFs. Depending on your level of income needs, there are other investment products to protect the principal in your retirement portfolio.
An annuity might be a way for retirees to diversify, satisfy a potential income need, and invest in a conservative fashion without having to sacrifice their entire retirement or investment accounts. (Learn more by reading Are Annuities a Solution for Baby Boomers in Retirement?)
Annuities should be viewed as an alternative to bonds and a replacement solution to other safe investments — such as CDs, money markets, savings accounts and even Treasury bills. Finding the right annuity is often time-consuming or difficult, because you might not know the gimmicks within the insurance industry. (Learn more by reading What to Know Before Purchasing an Annuity Income Rider.)
When researching annuities, the poorest mistake you can ever make is purchasing a variable annuity. The fundamental objective of using an annuity is to transfer any sort of risk onto the insurance company. By having a variable annuity, you’re shifting it right back to you and possibly stuck with keeping it for a long time, even after the surrender period has passed.
Be sure to work with a financial adviser who is not biased to a certain few insurance carriers or is captive — a term used for advisers that can only sell a “one-size-fits-all” solution. (Learn more by reading 5 Ways Financial Advisers Misrepresent Themselves.)
Markets have crashed and recovered, but you’ll never time it right. If history is a guide, the next time financial markets fall, they will eventually recover. Don’t panic. Make appropriate changes if necessary, and allocate what you can’t lose to principal-protected investments just in case the downturn is longer than you expected.
Carlos Dias Jr. is a financial adviser, public speaker and president of Dias Wealth LLC, in the Orlando, Florida, area, offering strategic financial planning services to business owners, executives, retirees and professional athletes. Carlos is a nationally syndicated columnist for Kiplinger and has contributed, been featured or quoted in over 100 publications, including Forbes, MarketWatch, Bloomberg, CNBC, The Wall Street Journal, U.S. News & World Report, USA Today and several others. He's also been interviewed on various radio and television stations. Carlos is trilingual, fluent in both Portuguese and Spanish.
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