Guess what? It’s not 2017 anymore. A least not in the investment markets. 2017 was a magical year. Returns were high and volatility was- well- pretty much non-existent. The “market” went up- and up- with nary a hiccup. It was awesome, but a little weird. 2018 might be different. January was another steady, profitable month. Then came February. The DOW dropped 1100 points, went up about 600 points another day, and so on. It’s been a good reminder. A one-direction market (either way) won’t last forever.
Of course, the press asked “experts” what people should be doing, and then asked “folks on the street” what they were doing. Most answered as I hoped- don’t panic, ride it out. Good advice, assuming our portfolios were aligned with our needs, risk tolerance (ability to sleep), and risk capacity (ability to survive bad outcomes). For young people, they won’t touch their retirement accounts for a long time. For us in our 50’s, planning to work a bit more, there’s no need to panic. But what about those nearing retirement- within 5 years?
In the old days, people heading into retirement had conservative, bond-heavy portfolios. Steady, secure income. They also had shorter life expectancies and more pensions. Now, a person mid-60’s may live, and invest, another 25 or 30 years. They can’t be overly conservative. Here are things to do if you’re within 5 years of finishing work.
1) Determine and set your investment allocation. In 1986, Brinson, Hood and Beebower determined the primary influence on portfolio return variability was allocation. Picking specific stocks and market-timing were minor contributors. They were talking about volatility- not returns. But an allocation, because of its effect on variability (gains and losses), influences long-term returns. Your allocation should reflect the returns needed to achieve your goals, with anticipated volatility in line with your risk tolerance and capacity. If you need- or go for- returns with risks you can’t handle, you’ll become your own worst enemy. Those hurt most by the Great Recession were people who panicked, sold low, and didn’t get back in.
2) Build cash reserves. Many planners advise retiring clients to put aside cash equal to 1-2 years of expenses (net of Social Security, pension income). If there’s a downturn, they use that money to live on. When things recover, the stash is replenished from the portfolio. This avoids selling when values are down. It somewhat mimics the freedom of a 30 year-old to ride it out.
3) Reduce (or eliminate) debt. The problem with debt is that it’s inflexible. The bill is due, good times or bad. Debt- free people have more flexibility to adjust spending.
4) Be flexible- if you can. If there’s a downturn as you near your retirement target, consider waiting a bit. Certainly, if all signs still say “Go” even with reduced values, retire. But, if you’re nervous or unsure, waiting a year won’t hurt. Down markets early in retirement really hurt. Their impact can last a long time. An additional year of adding to, and not withdrawing from, retirement funds can make a big difference.
Everything above is certainly within the abilities of most people. Some aren’t simple, but they are doable. If you don’t feel comfortable working through them, that’s what financial planners are for. Studies showed that during the Great Recession, people who worked with financial advisers were more likely to ride things out than panic-sell. It’s probably because they were properly allocated, educated about the risks they were taking, and could quickly assess the impact of the events on their plans. If you’d feel better with help, reach out to a fee-only financial planner. If you’d like to talk, please visit my website or give me a call.
Todd Washburn, CFP®
Todd Washburn Solutions, LLC
Fee-only financial planning
“Life Planning for Visionary People”
firstname.lastname@example.org // www.toddwashburn.com // 919.403.6633