If you are nearing retirement or are recently retired, there are few worse occurrences for your financial health than a bear market. As longevity has increased and interest rates have remained low, investors looking to maintain their living standard and to mitigate the risk of living too long need to allocate more money to higher expected return assets such as stocks. However, assets with higher expected returns come with higher volatility, and therefore investors must be ready for unrealized losses at the beginning of and throughout their retirement.
To help investors navigate a potentially rocky start to their retirement, we suggest the following strategies.
Cash is King
Setting investments to pay dividends, interest, distributions, or other periodic income to cash is important. What investments are worth when they are invested is paper wealth. What we have in our bank account is the actual wealth we use to fund our daily purchases and to meet our goals. Therefore, we believe it is important to hold more cash than might be deemed "optimal" because cash creates a cushion during volatile times.
Think in Terms of Buckets
With our early or near-retirement clients, we want them to think in terms of three defined buckets. Bucket one is the money they will use for their daily purchases. During this difficult market, we are counseling clients to hold up to a year of anticipated spending in cash (and potentially more given their situation and goals). The second bucket is money that will be spent in the medium-term (e.g., 5-15 years in the future). This money can be invested more aggressively because it is not necessary for tomorrow's grocery bill. However, during the current volatility, we are setting up all medium-term money to pay dividends, interest, distributions, and other periodic income to cash (see previous strategy). We then hold this cash because we can either use it to help create an additional cash cushion or we can reinvest the cash at depressed prices. The third bucket is long-term money (e.g., HSA, Roth, etc.) that the client may not need for many years or may be holding solely to pass to their heirs. Since this money has the longest time horizon, we can afford to be the most aggressive in our investment allocation. This is helpful to the overall net worth and future spending ability of the client because investments like stocks typically hold up well against inflation and longevity risk.
Take a Break from the News
The current news cycle is meant to grab our attention by constantly focusing on the worst possible outcome. The daily bombardment of fear-inducing headlines, tweets, and articles is not helpful to the financial, physical, or mental health of anyone. Therefore, we have been counseling our clients to put down their phones, turn off the TV, and give the newspaper a break. Instead, spend time talking to an old friend, taking a walk outside, or going to dinner with someone you love. By reconnecting to what really matters as opposed to allowing the endless “doom cycle” to control your emotions and actions, it is easier to put current events into perspective and make sure that your planning is based on your goals.