How should retirees deal with crazy markets when they don’t have time to “stay the course”?

Investing is a young person’s game, am I right? I mean, I can understand the argument for ignoring short-term market dives when it’ll be decades before you need to actually touch the money. But what about retirees who need income today? Should retirees and near-retirees be cashing out of stocks on fears that a worldwide pandemic will continue to throttle markets?

I recently discussed this concept on CNBC. Click the image to watch the video.

First, it’s important to address this question on an emotional level before attempting to respond rationally, because it’s not cold, calculating rationale that leads the charge in times of high market volatility, especially of the downward variety. (Indeed, as my friend Jeff Levine said, “Nobody ever seems to mind volatility when it’s up.”) Furthermore, when we are feeling and responding through the fast-acting, impulsive processor in our brain, thoughtful logic isn’t particularly comforting.

Retirees, in particular, may feel downright scared, and perhaps their fear is justified, because:

  1. They feel disempowered because they’re no longer earning a paycheck and are now reliant entirely on sources of income beyond their control. 
  2. They don’t have as much time as an investor in his or her 20s, 30s or 40s to recoup losses. 
  3. The math does change for those who are in the distribution phase of their life. Losses can indeed be compounded when you’re taking income out of a portfolio, rather than opportunistically buying through regular contributions.

Therefore, whether you’re a financial advisor counseling someone through turbulent markets or a white-knuckled investor eyeing the eject button, please know this: Every emotion is valid and worthy of acknowledgement. The best financial advisors will take it one step further and explore the emotions in play, even enlisting them in support of the best long-term investment strategy.

Once we’ve addressed this valid concern on an emotional level, it’s time to look at it from a logical perspective, and indeed, for most retirees, it’s important to maintain a healthy allocation to stock exposure in order to ensure that your lifestyle keeps up with inflation. In determining how much risk any investor should take, one’s “time horizon”—the ability to take risk—is a material consideration. A retiree in her late 60s has a shorter time horizon than a new investor in his early 20s, but, however limited, the retiree’s time horizon still isn’t zero.

Retirees need to satisfy income needs today, but they also need to address income needs in the future. Therefore, while it’s a slight oversimplification of a total return portfolio strategy, in times of extreme market volatility, I would invite retirees to view the meaningful portion of conservative fixed income in their portfolio as their income engine in the short-term while their portfolio’s stock exposure is designed to generate income years from now.

(Of course, this presumes that one’s fixed income portfolio is actually conservative, a stabilizing force in your portfolio. Corporate, longer-term, and especially high-yield bonds tend to have equity-like characteristics in down markets; so dare to be boring with your fixed income allocation.)

The optimal percentage of equities in a retirement portfolio will be driven by the retiree’s need to take risk. If you don’t need to take the risk, who am I (or any other financial person with a propensity for stock market cheerleading) to convince you otherwise? Yes, you might need a boost from market returns to outpace inflation. And yes, even if you’d struggle to spend all your money in this lifetime if you kept it in a Mason jar, you might consider investing it for the next generation. But there’s no moral imperative to endure market volatility if you don’t need or want the long-term benefits we expect to receive.

And that’s especially because the most important factor in determining how much equity risk you take in your portfolio is your internal willingness to assume risk. This is the gut-check test, and if you’re at risk of bailing out at the bottom—the worst possible time to sell—you must limit your exposure to stocks. Sticking with a conservative portfolio will earn you more in the long run than fleeing a more aggressive one.

Of course, you can only “stay the course” if you have one. You can only stick with the strategy that exists. Typically, emotions are heightened among those who don’t fully understand or can’t fully articulate their strategy and especially among those who don’t have one. 

Too many investors own a collection of securities—or even a collection of someone else’s strategies—that have built up over a lifetime, rather than a well-designed, purposely built, customized portfolio. Those investors should be concerned, and they should use this market hysteria du jour as the catalyst for a substantive portfolio review.

If you’re in the minority, however, who do have an understandable, goals-based strategy—who have considered their ability, willingness and need to take risk—and who have proportionately set their exposure to stocks, then by all means, rest easy and rebalance. Know that however ugly this particular market event gets, it likely will not amount to a blip on the radar when looking at your lifetime of investing. Acting rashly in these situations is more likely to do harm than good.

‘Someday Came’: How Our Vision Of The Future Shapes Our Saving In The Present

While on vacation recently in the Abaco Islands, on the outer rim of the Bahamas, I found myself on an important mission: taking the golf cart to the local market to restock our dwindling supply of the necessary ingredients for piña coladas.

I was stopped in my tracks en route by a welcome sign announcing a new resident’s beachside home. It read: “Someday Came.”

The obvious implication is that these folks decided to act on their “Yeah, I’m gonna do that someday” daydreams.

But it raises many questions, right?

Who are these people? What’s their story, financial and otherwise? Did they hammer this sign into the sand after scrimping and saving, finally realizing their retirement dream following a lifetime of toil? Or are they the professionally mobile couple with young kids you see on HGTV’s “Caribbean Life,” who decided they’d just had enough of the rat race?

I’m glad I don’t have the answers, because the big question for the rest of us is worthy of consideration:

How do we define our “someday”? How do you define yours?

The American Retirement Dream Is Not Dead

American retirees are screwed. The 401(k) experiment has failed. Social Security’s going bust. Savers haven’t saved nearly enough and don’t have the means to improve the situation.

However hyperbolic, this is the message that has been sent and, for many, is indeed the way it feels. But how do the facts feel?

Pension Facts:

  • Many companies have abdicated the role they once played in helping support employees’ retirements through defined benefit pension plans by promoting and then under-supporting defined contribution plans, like the 401(k).
  • Most pensions that remain — even those run by states and municipalities — are “upside down,” lacking sufficient funds to pay what they’ve promised. The entity conceived to insure underfunded pension plans is also underfunded.

401(k) Facts:

  • Some large financial firms have filled many of the 401(k) plans they manage with overpriced, underperforming funds, and offered little in the form of substantive education for the masses now left to their own devices.
  • After a six-year effort to ensure that financial advisors who manage retirement assets would be required to act in the best interests of their clients, there’s a corporate and political movement afoot for firms to reclaim potential lost profits if they were forced to do right by their clients.
  • Even some of the individuals who initially conceived the 401(k) concept and lobbied for it have recanted their support, regretting it ever started.

Social Security Facts:

  • The program intended only to be a safety net has become the primary financial resource in retirement for too many.
  • The surplus funds received when the huge baby boomer generation paid in — which are now being used to help replace the inherent shortfall of smaller generations — are projected to run out in 2034, thereby reducing the system’s ability to pay benefits by 25 percent.

There — how does that feel, now?

How To Know When To Get Out Of The Market

Originally published CNBCHas the market’s recent volatility worried you? Me too. It’s inevitable. Apparently, it’s how we’re wired. But better understanding that wiring can give us a clear decision-making framework to help us know if and when to get out of the market.

The field of behavioral finance has demonstrated that the pain we derive from market losses impacts us twice as much as the pleasure we feel from market gains. For this reason, investors are well served to name and address these emotions instead of setting them aside as they (unfortunately) have been taught.

We’ve all heard of the cost/benefit decision-making model, but “cost” and “benefit” are intellectual constructs too distant from the actual emotions that drive our decision-making. We need to address the gut—the “pain” and the “pleasure” associated with a tough decision. The following four-step model seeks to merge the head and the gut. And while it’s applicable in virtually any either/or scenario, let’s specifically address the decision to stay invested in the market or to move to cash:

Market Decision Image Cropped

1) The pain of staying invested is that I could lose even more.

Short-Term Memory Threatens Long-Term Success

Originally published CNBCWhen it comes to the market’s peaks and troughs, investors often don’t react as rationally as they might think. In fact, in times of extreme volatility or poor performance, emotions threaten to commandeer our common sense and warp our memory.

It’s called “recency bias.”

What the heck is recency bias?

Recency bias is basically the tendency to think that trends and patterns we observe in the recent past will continue in the future.

It causes us to unhelpfully overweight our most recent memories and experiences when making investment decisions. We expect that an event is more likely to happen next because it just occurred, or less likely to happen because it hasn’t occurred for some time.

This bias can be a particular problem for investors in financial markets, where mindful forgetfulness amid an around-the-clock media machine is more important today than ever before.

Try thinking about it this way. In the high-visibility and media-saturated arena of pro sports, every gifted athlete knows that the key to success can be found in two short words: “next play.”

Stressed-Out Gen X and the Search for a More ‘Livable’ Life

Originally published CNBC“We’re just overwhelmed with life.” That was my response to an attorney looking for insight into the obstacles facing Generation X.

I’d referred a number of 30- and 40-something financial-planning clients to this attorney. All were in need of estate-planning documents.

But he came to me concerned about the difficulty he was having in reconnecting with clients who’d begun the process but were struggling to find the time to complete it. The time to complete anything, really.

While folks of all generations struggle with being overwhelmed by the various responsibilities and obligations of life, I see the problem as endemic within the ranks of Gen X, my peers.

Each year, 20 financial planners are chosen nationally to represent the advisory community on the CNBC Financial Advisor Council.  Tim was chosen for the second consecutive year.

Date: January 2, 2015
Appearance: Tim Maurer Chosen Again to Sit on CNBC Financial Advisor Council
Outlet: CNBC
Format: Television

How to Protect Your Biggest Asset–Your Income

The Most Complex Insurance Explained, Part 1

Originally published CNBCYou’ve got a machine just sitting around your house. It’s a money-printing machine, and it’s perfectly legal. This machine is expected to print $75,000 this year before taxes. You’ll use that cash to pay your household expenses.

Each year, the machine will print 3 percent more than it did in the previous year, and it will continue doing so for the next 40. That means, over its lifetime the machine will print $5,655,094.48, easily making it your most valuable asset today.

printing_money_for_aig_xlargeYet there it sits, maybe in your garage, between an inherited set of golf clubs and a wheelbarrow with a flat tire, unprotected. Uninsured.

The machine, of course, is you, or more specifically, your ability to generate an income. It didn’t come cheap. You and your parents invested years of training and likely tens of thousands of dollars in hopes that your machine would not only support you financially for a lifetime but launch another generation as well.

We don’t question the need to buy insurance for the things our money machine purchases. But few of us know if—or at least how and to what degree—their income-generation engine is protected.

Do you?

street signsWith markets entering a period of significant volatility this past week, CNBC was curious what type of discussions I’m having with clients.  I told them, in short, that I’m talking about ways that we, as investors, can benefit from market losses.

Date: October 17, 2014
Appearance: Gaining Through Market Losses – CNBC
Outlet: Street Signs on CNBC
Format: Television

3 Reasons to Avoid ETFs: Advisor

Originally published CNBCExchange-traded funds—commonly referred to as ETFs—are all the rage. While there are several excellent reasons to use an ETF over the seemingly archaic traditional mutual fund, they are not a universally preferable solution.

First, to be fair, let’s review a few reasons why ETFs can be a better solution than mutual funds.

ETFs generally have lower associated costs than comparable mutual funds. This isn’t news, I know, but since costs are one of the few variables over which we have control as investors, I don’t mind flogging this deceased ungulate.

The expense ratio is the most obvious cost reduction. For example, the legendarily inexpensive Vanguard 500 Index Fund has an expense ratio of 0.17 percent, while Vanguard’s S&P 500 ETF has a barely noticeable expense ratio of 0.05 percent. This makes ETFs an ideal choice for investors making a sizable, broadly-based, one-and-done purchase.