Capital Investment Advisors

Retirement Q&A: How To Plan For Retirement Right Now

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As we soldier through the COVID-19 economy and its impact, Americans at every stage of life are wondering how the current realities will affect their long-term financial prospects. Here are some questions I’m hearing from retirees, soon-to-be retirees, and folks who are dreaming and planning for the still-distant day when they can call it a career.

While everyone’s financial goals and situation are different, the answers below are generally applicable and, I hope, will offer some comfort as we seek to safeguard our dreams for the future.

I’m age 65 and recently retired. Even my well-diversified portfolio has taken a hit during the COVID-19 market crash. This market and economy feel worse than we’ve ever seen. Should I just sell out and keep my money in cash until we recover?

Waiting out this crisis in cash is equivalent to timing the market, which I don’t recommend in any situation. The impulse to sell everything and buy back into the market when things get better is understandable. We are in an emotional period – we face both health and economic issues. This twin threat makes things feel very scary – as nerve-wracking as the Great Recession, 9/11, or even World War II.

But I urge you to stay the course. Rather than going 100% in cash, I recommend these three things: dry powder dry, quality and income, and recovery.

1. Dry Powder Dry – Make sure that your portfolio does include some cash. If you are a retiree aged 65 or older, I want you to “take the abyss off the table.” This means that you have enough cash to cover your spending needs. Think about your safety assets in terms of years versus percentages. Perhaps you look at three years or even more, like five years. So, rather than having 10%, 20%, or 30% in cash and safety assets like bonds in your portfolio, I think this is a critical time to think about your safety assets in terms of years.

This means that if you have three years’ worth of the additional money you need to supplement your Social Security or pension benefits, then you don’t even have to touch your equity side of your portfolio for that period.

For example, if you need $2,000 a month from your portfolio to supplement all of your other income streams, that means you need $24,000 from your portfolio each year. Well, if you have 50% of a $500,000 portfolio in safety assets like cash and bonds, that would be just shy of $240,000 in safety assets. But you don’t just have 50% in safety assets; you have money to supplement you for the next ten years.

If we continue to experience a terrible COVID-19 economy for the next, say, year, you know that you are covered for that period. So, I like thinking of my dry powder in terms of the length of time it can sustain me, rather than its percentage in my portfolio.

And, just to make investors feel more secure about being in these assets, the Federal Reserve has provided significant backstops to the bond market. They have pledged to buy an unlimited amount of bonds to make sure there is always a buyer in the bond market to prevent another freeze-up similar to what we saw at the beginning of March. Since the Fed’s March 23 announcement, the credit markets have behaved much more calmly.

2. Quality and Income –  The stock portion of portfolios should be focused on high-quality companies that have plenty of cash, are not speculative and are not impacted by some of the most difficult challenges of the economy. Some of the companies that I prefer that meet this definition have been dividend-payers for multiple decades. Take a look at your holdings to see if any of the companies you own are being squeezed by COVID-19. Some of those sectors would be leisure, hospitality, restaurants and even the retail industry.

3. Recovery – It’s important to visualize where America will be in 12 to 24 months. The medical community is confident that we’ll have a vaccine for COVID-19 by the beginning of 2021. We could have therapies and treatments available much sooner than that. It’s important to stay invested because, as the last month-and-a-half has taught us, markets can go down very quickly. But they can also rebound just as quickly.

We had the best 13-day rise in the history of the market after stocks bottomed out in this most recent tumble. This is not to say we have put in a solid bottom; we’ll only know that in distant retrospect. But, if we’re not participating in the market, we can miss out on tremendous gains. We know from market history that a short span of days creates these tremendous gains. Remember that long-term market participation – not perfect timing – is the key to sound investing.

I was supposed to retire this time next year, but now my portfolio has dropped from $1,000,000 down to $850,000. Should I keep to my original schedule or keep working?

From a financial perspective, it’s generally better to add to your portfolio. But that has to have an endpoint. This is why goal setting and planning are so important.

Your portfolio and the amount of income it can generate – in addition to your other income sources – Social Security, pension benefits, rental income, part-time work – is what matters at the end of the day.

This takes me back to the 4% Rule, which says that you can take 4% of your initial retirement assets in income and increase that amount every year to account for inflation, assuming a 50% to 75% portfolio allocation to stocks. Studies of the 4% Rule show that, in the worst-case scenario, with careful application of this guideline, your money should last 35 years.

If applying the 4% Rule to your current portfolio gives you the income you need to fund the retirement you’ve planned, then you should be fine. But remember that the 4% Rule is a guideline – during better years, you can take out more, and in lean years you take less. Application of the 4% Rule is also helped by having more in investable income assets. So, my advice in this stressful COVID-19 economy, if feasible to your situation, would be to delay your retirement to give yourself a little extra time to bolster your savings. This time added on will also allow you to retire into a more stable, post-COVID world.

As a side note, some folks are using the term “Great Depression” to describe where we are now. I disagree. From where I stand, this is a “great economic pause” that will likely result in a bad second quarter of 2020, a less-bad third quarter, and a decent fourth quarter.

I just retired last fall, but I left my portfolio in a very heavy stock allocation, so I’ve lost a good bit of my savings. How can I protect my retirement for the next 30 years?

Now is an excellent time to re-think your portfolio allocation! The COVID-19 crisis isn’t the first or last significant market correction. If the current ride feels overly risky to you, you should take a look at your allocations. But while bad news is that the market dropped 35%, the good news is that we have seen a significant recovery. What a great time to re-balance your portfolio by applying the 4% Rule, which says you should be anywhere from 50% to 70% in equities. Make sure you re-balance every year to maintain that allocation.

I’m 50, and I’ve always been a diligent saver in my 401(k). Unfortunately, I was recently furloughed, and I need to access some of my retirement savings. What’s the best way to do this and still retire on time in a few years?

Borrowing from your retirement account is generally not the best option, but these aren’t the best of times. If you need to take money from your tax-deferred retirement fund to get through this wild ride, that’s okay.

The CARES Act recognizes this widespread need by allowing loans up to $100,000 with no penalties and several years to pay the resulting taxes. I do suggest taking the minimum amount necessary to meet your living expenses.

As to retiring on your original schedule, again, I believe we are in an economic pause, not a long-term slump. So, with perhaps a bit more aggressive saving in the coming years, you may well turn in your office key as planned.

I’m 67, and I have a fixed income with my pension of $3,000 per month and Social Security at $1,500 per month. I’ve not heard that anything will change, but I should be worried about either of these amounts changing in the near future?

Let’s talk first about Social Security. I fully expect that all current Social Security recipients will receive their full retirement benefits for life, regardless of any changes that may come to the Social Security program. As for your pension, I believe you can rest easy there, too. While the under-funding of pensions is always a concern, your $3,000 monthly payment is within the range of benefits insured by the Pension Benefit Guaranty Corporation (PBGC). If your former employer defaults on its pension obligations, the federally chartered PBGC will make sure you get paid.

I answered more retirement questions in my YouTube Live below:

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