Should Retirees Stay Invested and Ride Out These Volatile Times?
If the markets’ ups and downs have you feeling sick, it’s time to take stock of your whole financial picture. Here are five pieces of that puzzle to help guide your decision.
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As volatility and uncertainty in the financial markets remain at levels unseen in years, one of the most common questions for those readers who are currently retired or plan to retire soon, is this: “Should we stay invested and allow our investments to just ride out this wave?”
It’s a question that almost all investors, no matter what age, have been asking for months. However, for those approaching their golden years, getting this decision right is critical to maintaining a prosperous retirement and avoiding the need to put life on hold.
There is absolutely no one right answer to this question given that the needs, wants and desires of every retiree are so vastly different. Relying on generic advice to determine the most appropriate strategies can be dangerous and result in less-than-desired outcomes.
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Though there are many parts to this equation, here are a few foundational things to consider when answering this question for yourself:
1. Know your ‘Income Security Score’
Your Income Security Score is quite simply the percentage of your monthly expenses that are covered by predictable and guaranteed sources of income, such as Social Security, pensions and annuities. For example, if your monthly expenses are $5,000 and these guaranteed income sources combined account for $3,000/month, then your income security score would be 60%.
In this case, there is a “gap” to be filled of $2,000 that needs to come from other sources just to maintain lifestyle. If that means taking regular distributions from accounts that are volatile and fluctuate, that can be a dangerous approach, resulting in possibly having to sell assets when values are low. However, if your score is near or at 100%, you should now have more flexibility to ride out the ebbs and flows of the market and be better positioned to dictate when to make those distributions.
2. Understand Your Various ‘Investment Time Frames’
As retirement approaches, there is a good chance you heard someone tell you that your investment time horizon is short, and the prudent thing to do is shift a significant portion of your assets away from stocks and into historically more conservative investments like bonds, CDs or cash. But understand that not all parts of your retirement will fall under the umbrella of a “short” time horizon.
The actual need for cash in the near future would ABSOLUTELY apply and be considered a near-term need. However, living a quarter century or more in retirement, paying for the cost of health care or continuing to grow a legacy you wish to leave are all still pieces to this equation that require us to consider long-term growth strategies for that portion of our wealth, which we may be comfortable keeping invested.
3. Find Fun (and Security) with a Second Career
For those retirees willing and able, finding part-time work doing something they love could be beneficial in several ways. Think about combining work with endless amounts of hobbies or passions, such as securing employment at an area golf course, lawn and garden center, or with a local sports team. Your options are endless, but could be significant if part of your overall plan.
Besides the emotional satisfaction a second career could bring, the ancillary income you earn could help fill any gap that may exist in your Income Security Score (see above) and eliminate the need for regular distributions from your investments, possibly allowing you to stay the course during these volatile times. In addition, any excess earnings not needed to meet monthly obligations can be invested systematically into the market to take advantage of dips or declines. Not only will you not be needing to sell when your portfolio is down, but instead you can make this work to your advantage by purchasing new investments at a discount.
4. Fill the Right Buckets
It’s important to view your wealth in its entirety and determine how much you will need to carve out and dedicate for your short, intermediate and long-term needs, wants and desires. Do not co-mingle funds for these various needs, but instead determine how much to set aside for things such as generating needed monthly income, future health care costs, legacy wishes or even discretionary desires.
As you gain a better understanding of your retirement needs in totality, you will be in a better position to determine how much of your wealth you can subject to the risk in the market and how much you will need to reallocate to other options, such as cash or insurance tools.
5. Get More Active with Your Money
For your money that remains in the market, transitioning from a “passive” money management approach to one that is more “active” could be a nice option. Passive investing, also known as buy-and-hold investing, may have worked well during our 20s, 30s or 40s because it was simple, automatic and quite possibly inexpensive. However, because the impact of market highs and lows is felt even more in retirement, it’s important to help smooth out the ride.
Consider hiring an adviser whose approach to active money management is one you can understand and are comfortable with. There are dozens of active philosophies and strategies, so find an adviser who is information driven and willing to recalibrate portfolios however often the data warrants, versus relying solely on individual advisers trying to “time the market” based on a “gut feel.” Understand that there is no perfect philosophy of active investment management, so do your homework to find the right fit.
These are uncertain times with no apparent end in sight. Take time to reflect on these principles as you navigate the path ahead.
Investment Advisory Services offered through Trek Financial LLC (Trek), an SEC Registered Investment Adviser. Information presented is for educational purposes only. It should not be considered specific investment advice, does not take into consideration your specific situation, and does not intend to make an offer or solicitation for the sale or purchase of any securities or investment strategies. Investments involve risk and are not guaranteed, and past performance is no guarantee of future results. For specific tax advice on any strategy, consult with a qualified tax professional before implementing any strategy discussed herein. Annuity guarantees are backed by the financial strength and claims paying ability of the issuing insurance company. Financial products and services if recommended may include investment advisory fees, commissions and/or other charges. Trek285
Investment Advisory Services offered through Trek Financial, LLC, (Trek) an SEC Registered Investment Adviser. Information presented is for educational purposes only. It should not be considered specific investment advice, does not take into consideration your specific situation, and does not intend to make an offer or solicitation for the sale or purchase of any securities or investment strategies. Investments involve risk and are not guaranteed, and past performance is no guarantee of future results. For specific tax advice on any strategy, consult with a qualified tax professional before implementing any strategy discussed herein. Trek 21-115.
This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.
Nicholas Toman, CFP®, is a lead retirement planner and investment adviser with Empowered Financial Management (opens in new tab), a firm that specializes in retirement planning for those individuals within five to seven years of retirement or who have recently retired and no longer wish to serve as their own financial adviser. Nicholas is a graduate of the University of Wisconsin-Whitewater with a BBA in accounting and has been a Certified Financial Planner since 2014.
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