With Stocks Still Near Their Highs What Should Retirees Do Now?Submitted by 215 Advisors LLC on July 3rd, 2016
Although the stock prices are trading near their all-time highs, it hasn’t exactly been a joy ride for retirees who are counting on their retirement plans for a lifetime of income. The type of unruly market action that we have seen over the last few months always unleashes a flurry of “expert” commentary that seems to be directed at those who are most vulnerable to flash declines. Specifically, the pundits are talking to those investors who are now relying upon stock market returns to feed their incomes and instilling doubt over their investment strategy.
Many of these financial gurus have suggested those who are nearing or in retirement should not be invested in the stock market. While this opinion is widely heeded during times when the stock market plunges several percentage points day after day, it would be important for retirees to consider a longer-term perspective. People turning 65 years old today can expect to live 25 or 30 years or more in retirement. It is, therefore, a necessity to employ an investment strategy that will increase the market value of the portfolios over time while minimizing the loss of capital. That was an easy order to fill in over the last six years, but as the stock market approaches new highs, retirees need to consider their withdrawal strategies in the context of their specific income needs.
Retirees who are not taking withdrawals- If you’re not taking withdrawals due to receiving a pension, Social Security, or another form of income, you should (but probably won’t) feel a bit better than others. Any decline in the stock market can affect your portfolio, but, at least for now, it will not affect your paycheck. If your portfolio is diversified, and you continue to make adjustments to ensure your portfolio stays diversified, it should be able to weather the ebb and flow of the market. Should you ever need to make a withdrawal, you should have portions of your portfolio that can be liquidated, which will not result in having to buy high and sell low.
Retirees who are taking withdrawals – Imagine your portfolio as one of those variety cheesecakes from Costco. The cake has 12 or so slices, with each slice representing a different type of cheesecake. Your portfolio is no different. Recently, some of those slices (the slices that represent stocks) have seen increases in value, while others have seen decreases in, or stability in value (the ones that represent bonds, cash, and hard assets).
When converting assets into income, you would want to take the slices with increases and cut them back to their original size. Because you usually have several months (in some cases years) of distributions available in those slices, you will not be forced to sell slices that have declined in value. Periodically, it is important to prune gains from slices that have grown in value- in a process called rebalancing. Some advisors treat distributions differently, in which they take a small portion of each slice for every withdrawal. While this is easy for the advisor, it is generally not wise to do in these situations.
Clients who are taking BIG withdrawals- If your withdrawal amount is too much, you’re most likely going to run out of money despite market conditions. The only thing that a down market will do is exacerbate the problem. While you can put your portfolio on “financial life support” by shifting out of volatile asset classes, the handwriting is on the wall that these types of accounts are simply unsustainable. Retirees in this group are akin to the Federal Government- they must make tough decisions as to cutting expenses or increasing income, but individuals cannot print money, nor is it easy to obtain loans or move in with kids.
The stock market can be scary- but the same investments that cause us consternation are vital to long-term income growth. For retirees, an ample helping of stocks or stock mutual funds is not only prudent, but necessary to generate the types of returns necessary to combat the effects of inflation. Portfolios with optimum diversification among several asset classes are best positioned to adjust flexibly for both good and bad market conditions.