What To Do about Retirement In a Bear Market
Stock market investors have taken a big hit in recent weeks, with recent retirees hit hardest. But there are still options on the table.
Investors have been stunned with recent portfolio losses as the Dow Jones Industrial Average has racked up eight of its worst 10 days of falls in its history, and the volatility index has soared. Even in the boom leading up to the fall, more retirees (61%) feared outliving their money more than dying (39%), according to an Allianz Life survey. The hit has been particularly hard for those planning to retire soon and recent retirees.
Sequence of Return
This is due to sequence-of-return risk, a concept that is important to understand if you’re among those affected. The problem arises when a market drops substantially when an investor has just entered retirement, or right before. The base of assets which will have to last for potentially decades is substantially lowered.
For example, someone who retired in 1982 before a long market rise, and with assets divided evenly between stocks and bonds, could have safely taken out almost 10% annually for 30 years. But someone who retired in 1966, before a down market, could only draw down 4% with the same portfolio allocation over the same three decades.
Some people in the know are even pessimistic about that 4% number. Stock valuations are still elevated from a historic standpoint, and interest rates have fallen through the floor. A person retiring today can only safely withdraw 3% annually, according to Bill Bernstein, author of The Investor’s Manifesto: Preparing for Prosperity, Armageddon, and Everything in Between. That means a $1 million portfolio can only safely generate $30,000 per year, adjusted for inflation annually.
Potential Remedies
Fortunately, there are things investors can do to alleviate the problem. Following are some ideas to consider:
Delay Social Security. It may be wise to wait until age 70 to begin taking Social Security payments. Bernstein recommends this tactic, adding that “effectively, you’re buying the world’s best annuity.” Monthly benefits rise 8% every year after full retirement age.
However, this is not the best strategy for everyone. It may be better to take the money earlier and invest it, especially if you think the market will rise. Spouses need to consider the impact on their partner. And many divorced earners won’t see any gain if their own earnings would qualify them for a smaller payout than half of their former spouse’s benefit, which is available at full retirement age. Find your current Social Security benefit estimate here.
Buy an Annuity. This may not be the time to sell stocks. But if a retiree has bonds or cash on hand, an annuity can provide guaranteed returns going forward. “A lot of people have an extreme bias versus annuities,” says Hayden McCoy, a financial planner in Georgetown, Texas. “But for the right person, they can be the perfect fit.”
Increase stock holdings. If retirees have excess cash, they may want to put it back into the market. This may seem counter-intuitive, but when a bear market hits, stocks are on sale. It’s like you were shopping and saw a sign for 25% off.
Bear markets typically don’t last as long as people may think. According to data from Ned Davis Research, it has taken an average of 3.2 years for the 36 bear markets from 1900 to now to make it back to the previous recorded high, taking dividends and inflation into account.
Reduce bond holdings. With returns at historical lows, it may be time to reassess bond allocations. Many investors fail to tally home equity, pension benefits and Social Security in their total investment outlook. However, many investment professionals believe these assets should count as conservative investments or income streams.
Refinance. Whether it’s a home or rental property, interest rates are low. If retirees haven’t paid off a property, they should make a few calls to see if current rates could improve cash flow. It’s fine to start with the current lender, but calling other banks and credit unions (many require a nominal $5 to join) to compare rates can save a lot of money over the life of the loan.
Conclusion
In these uncertain times, taking a direct hit to the portfolio adds insult to injury. There is an abundance of worry about jobs, health and the economy. Retirees with a pounded portfolio can be forgiven for hunkering down and waiting for normalcy to return. But we should be using this time to our benefit, evaluating changes we can make to improve our position going forward. Schedule a call with your financial professional to see if any of the options above can benefit you.
Source: Society of Certified Senior Advisors Blog: Monday, March 23, 2020