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.

Pogo Stick Retirement Planning for Younger Generations

Originally in ForbesHistorically, retirement planning has been likened to a three-legged stool — consisting of a corporate pension, Social Security and personal savings. Baby boomers saw the pension fade from existence, leaving them to balance on retirement planning stilts. For younger generations, however, the retirement situation can seem even worse. Sometimes, it feels like it’s all on us. We’re left with only a retirement planning pogo stick.

Further complicating matters, doctors suggest that the length of life Generations X, Y and Millennials can expect may exceed that of our parents and grandparents. We’re likely to live a long time, but our quality of life — to the degree that it is improved by cash flow — is in question because of the heightened savings burden.

Last week, I shared two “silver bullets” — MOVE and WORK— for hopeful boomer retirees who may fear that a 14-year stretch of economic uncertainty has put their goal for a comfortable retirement out of reach. Here’s how these two concepts can be applied to younger generations:

Know Yourself: Conscious Retirement Planning

So you’re old enough to have finally purchased the house and made it a home.  You’ve molded your children into fine readers and artists as well as piano, soccer and lacrosse players.  You’re on the board of the local Y, you support the PTA and normally make a contribution to the offering plate when it’s passed.

How about your retirement plan—how is that coming along?  Do you have an inherent tendency making saving easy for you, or is it more difficult? Each of us has a saving personality on a continuum spanning a wide spectrum.  Are you a Spendthrift, a Spender, a Saver or a Hoarder (or somewhere in between)?  Your optimal retirement savings methodology depends on that answer.

 

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Most educators in the realm of personal finance take aim solely at those who find themselves on the left side of this continuum as if more is always better, so I’ll first address those predisposed to over-saving.   Hoarding is warehousing money simply for the sake of seeing it collect, not for a specific use or purpose.  This practice is idolized by far too many in the realm of money management, but hoarding is actually a financial disorder.  I’ve written recommendations for mandatory vacations in financial plans for hoarders to help break their addiction to stockpiling, and I don’t presume it’s a fault simply driven by greed—for many, it’s fear.

Those who lived through or felt the effects of the Great Depression saw such vast amounts of wealth decimated that many developed a scarcity complex.  A client I was blessed to call a friend passed away last year at the age of 87 with no lineal descendants and over three million dollars in liquid cash and investments.  The good news is that three worthy charities benefited from her generosity; the bad news is that she worked until she was 70, she never took a vacation (not once!) and she lived in a bad neighborhood in which she was burglarized and assaulted (but thought she couldn’t afford to move).

Conversely, a good friend and financial planning colleague of mine is living and battling with Cystic Fibrosis, a disease attacking the lungs which leaves its afflicted with a life expectancy of 37.4 years.  My buddy is married with two beautiful children and turns 37 this year.  He’s forced to be focused both on the future for his family’s sake (and hopefully for his sake as advances in medicine push towards a cure for CF), but he also recognizes the absolute necessity of getting the most out of every single day.  Tomorrow is promised for none of us, and our retirement plan should reflect that.

Am I, a financial planner, suggesting you could actually save too much for retirement?   

Absolutely!  I’m not demonizing any particular level of net worth, but you may be socking away as much as humanly possible for your future even to the detriment of your (and your family’s) present.    Many advisors will, driven by their economic bias to manage your money, use the save-for-your-family’s-future guilt trip to wrench more of your dollars into accounts they can oversee.

It is also important for me to acknowledge most of us are actually more inclined to lean in the direction of the spendthrift than the hoarder.  It’s easy to over-value the present because we can see, touch and feel it today.  And many of us have so many pressing concerns demanding attention and funding, it’s only natural for deferred gratification to take a back seat.  So my calls for balance between your future and present plans should not be received as a blessing to underestimate the importance of saving for the future.

The key, therefore, is to know yourself and be honest about your strengths and weaknesses pertaining to saving and spending tendencies and patterns.  

If you’re a spendthrift, you may likely need some form of intervention.  You may need to institute personal austerity measures—like the governments of Greece and Ireland—or introduce some level of accountability with a mentor of sorts.  If you’re a spender, it is likely you can effectively train yourself by setting up automatic savings mechanisms, diverting funds directly from your checking account (or paycheck) to the buckets you’re filling for the short-, mid- and long-term.

A sign you’re a natural saver would be that extra cash piles up each month—seemingly effortlessly—but you may also judge and condescend to family and friends without the same innate advantage.  If you’re a hoarder, you too may need intervention…to force yourself to spend!  One of the best ways to redirect in this regard is first to offer your services—not your money (at least initially)—to a worthy charitable organization, like a homeless shelter.  Or go on a mission trip to a third-world country and see how people live with nothing.  I’m not trying to guilt you into giving your money away, but to demonstrate how people with absolutely nothing may experience more happiness than you.  You’ll have to experience it to believe it.

Retirement planning is not a science, but behavior management is.  By better understanding yourself and controlling the only economic assumption over which you have absolute control—YOU—you’re likely to better enjoy your retirement, and all the days leading up to it.

*This post will also be appearing on TheStreet.com.