The current pandemic is causing many Americans to seriously contemplate their finances and retirement plans more closely. Those approaching retirement are wondering if this is still a good time to retire, what this will mean for their future, and if it will greatly impact their retirement investments.
They are also worried about their estate plan, and if the retirement savings they have in place will still be enough.
It’s not a bad idea to take this time to contemplate all of these things, and Bob Michaels is here to help. Bob is working with clients every day as they navigate these challenging times, and we highly recommend you reach out. Having a strong estate plan in place will help you know that your retirement will be protected, regardless of what life brings. Bob is available for free consultations by phone, virtually, or in person.
Securing Your Investments
While most of the country is focusing on staying healthy and safe during the current pandemic, it’s hard to escape the real economic impact all of this has taken. The general age group most susceptible to the health dangers of COVID-19, people 60 years old and older, includes many Americans who are nearing retirement. The recent stock market volatility has, in many cases, significantly impacted their portfolios. Many are concerned that their retirement savings will no longer be enough and what that might mean.
However, if you had a solid plan in place before the downturn hit, it should still carry you through, provided you do not take too many risks in the coming months.
Should You Still Retire?
For those considering retirement right now, working longer or waiting for the stock market to rebound is certainly a consideration. No one likes to see their net worth reduced as they start their retirement. Before you jump to conclusions, however, you might want to make a few considerations. Most people who have a well-balanced, diversified portfolio, should be able to rely on their investments to carry them through.
Use the 4% rule
This formula has worked even through many periods of poor returns, including the Great Depression, the tech bubble of the early 2000s and the Great Recession of 2008-09.
History shows that there is a low probability that a person or couple with a diversified portfolio will deplete their principal over 30 years if they enter retirement and withdraw no more than 4% of their beginning balance, adjusted for inflation each year. In fact, for over half of the 30-year periods tested back to 1926, the portfolio value at the end was higher than it was at the beginning.
Based on this 4% withdrawal principle, if you retired with $1 million earlier this year — even though it may be down right now — you can still withdraw $40,000 (4% of $1 million) from your portfolio in Year one. By year two, you should be able to increase your withdrawal to $40,800 (assuming 2% inflation), etc.
Through March 31, 2020, a portfolio of 60% MSCI ACWI global stock index and 40% Barclays Aggregate Bond index has grown 6.84% per year over the past 30 years. Investment returns are not always consistent from year to year, but assuming this rate of return continues for the next 30 years, that $1 million portfolio would be approximately $2.4 million in 2050 — or roughly $1.3 million in today’s purchasing power, assuming a 2% rate of inflation.
Bear markets are common — there have been 25 of them since 1928 — but we haven’t seen one since the Great Recession in 2008/2009. Since 1957, the average duration of bear markets is around 12 months, and the average duration for bull markets is around 55 months. The average decline for the S&P 500 index in a bear market is approximately 34%, and the average gain in a bull market is approximately 153%. This shows us that good times tend to last longer than the bad times.
Over the last 70 years, approximately 75% of the S&P 500’s strongest days have occurred during bear markets. So, if history has taught us anything, the best way to weather the storm is to stay the course.
Make Certain Your Portfolio is Diversified
Most new retirees have both stocks and bonds in their portfolios. They may have real estate or alternative investments as well. While stocks are taking a hit right now, it does not need to derail your game plan.
In recent years many were concerned their mix of stocks and bonds might be holding them back, especially when the S&P 500 grew by 31% in 2019. Now, however, the tables have turned. Stock portfolios may be decreased, but bonds are holding up comparatively well.
Each person needs to find their balance for risk and stick to their long-term allocation. Bonds provide a hedge against falling stock prices and typically hold up well as investors appreciate the safety of income-producing, high-quality assets when stock prices are dropping.
During these swings in the market, an investor’s mix of stocks and bonds can get out of balance. For example, if you started with 60% invested in stocks and 40% in bonds, a 25% drop in the stock market means you now have roughly 53% of your portfolio in stocks and 47% in bonds.
To rebalance, you will need to sell bonds and buy stocks, getting the portfolio back to its 60/40 mix. This strategy enables you to take advantage of buying stocks at lower prices, which will help ensure you achieve the long-term growth that is needed to support your retirement. Rebalancing your portfolio during bear markets will help you benefit from strong stock returns when they come around.
Use Cash to Cover Living Expenses
In general, it is not wise to sell stocks now, as you will be selling positions that have dropped in market value. A good rule of thumb for retirees is to have enough cash in the bank to pay for one to three years of living expenses, and enough investments in bonds to cover three more years — thereby leaving your stock portfolio untouched during difficult times.
For example, a couple with monthly expenses of $8,000 may receive $3,000 in Social Security payments and other retirement income. This means they will need $5,000 in cash each month for expenses and should aim for approximately $60,000 to $180,000 in cash for short-term needs. This amount will help cover expenses for a year or more while you wait for the bear market to run its course.
Delay Any Major Expenses Right Now
Being quarantined in your house may lead to grand visions of kitchen remodels, finished basements, or a second home on the beach, but now is not the time to be considering these large purchases. It’s best to put these plans on hold while your portfolio recovers, so you won’t need to sell stocks when they are down or drain valuable cash in the bank.
Although it can be difficult to watch your portfolio fluctuate, it’s important to keep in mind that downturns are only a temporary part of the process. If you can be frugal now and not let emotions derail your investment strategy, it should pay off when the market recovers.
Have A Plan for the Future To Protect Your Retirement
Those who had a firm estate plan in place before the pandemic started, are not as concerned right now. Which is why it’s important to have a plan! What we all hopefully learn from this, is that life can change in the blink of an eye, and if you are not ready it can devastate you and/or your loved ones.
Bob Michaels is here to help and is currently working with clients by phone, virtually, or in person. Reach out today, we’re here to help!