October 17, 2014
Janet Kidd Stewart
Of course, having already anticipated the long-awaited downdraft would have been ideal, but even if you were rebalancing your nest egg throughout the stock run-up, a protracted downturn can rattle even the most patient investors.
“Most people were ready and waiting for a fast and furious correction, but a month from now it’s a whole new ballgame if this is still going on,” said Michelle Perry Higgins, a financial planner and principal at California Financial Advisors.
Depending on where you are along your retirement journey, there are a few key gut checks to give yourself, experts said.
Pre-retirees. Conventional wisdom says that young savers should buy stocks when they’re on sale and that market downturns should be seen as a retirement gift to the young because of their long time horizon to make sure their portfolios recover. So is now a good time to repay that 401(k) loan?
Not so fast. Consider a research note this month from Robert Arnott, chairman of Research Affiliates, an investment management firm, and his team. The title: What Are We Doing to Our Young Investors?
Arnott questions target-date mutual funds’ high equity exposure for younger investors, noting that many who lose their jobs during recessions will have to draw down their retirement accounts as they create a bridge to new employment.
One potential fix, he says, would be to build a starter portfolio within a retirement account that is invested a third each in stocks, bonds and inflation-hedges (think inflation-protected Treasuries, real estate investment trusts, emerging markets and junk bunds). When this mix grows beyond, say, six months’ worth of income, then more risky investments can be added.
By all means, paying off a 401(k) loan is a good thing, financial experts said, but before plunking it all into stocks as a buy-on-dips strategy, consider whether that move brings you closer to an appropriate investment mix.
To be sure, avoiding a 401(k) raid in the first place is the best-case scenario, so think hard about your reasons for tapping the money, said Catherine Golladay, vice president of 401(k) participant services for Charles Schwab.
As stocks marched ever higher last spring, Schwab surveyed 1,000 401(k) holders about plan loans. Of those who took them, nearly a quarter reported they were using the money for home repairs or vacations.
“It’s discouraging to see people aren’t understanding the full implications of these withdrawals,” Golladay said.
Volatile markets have an uncanny way of clarifying that perspective, of course.
Red zone. How should people about to retire view the recent volatility?
Absorbing a stock market correction just as you pull the retirement trigger can be hugely stressful, so even if you’ve hit your number, take a moment to reflect on what another big leg down in the market would do to your strategy for taking portfolio withdrawals for income.
It’s also a time to soberly question the return assumptions built into the retirement income plan you’re about to begin, said Tom Brakke, a financial adviser and investment industry consultant. Many advisers adopt overly optimistic return projections, he said, creating a false sense of security.
- Just when retirees thought rates on “safe” investments were finally about to rise, the current market volatility has thrown even that into question. What to do?
Focus on the things you can control, Brakke said. He recommends keeping three distinct emergency funds: One to stash funds to cover larger bills that can’t be covered by your latest Social Security check and other monthly retirement income; one for known major purchases such as cars and long-planned travel; and one he calls the “life happens” fund, for true emergencies.
Only after the emergency buckets are filled with low-risk investments can seniors dip their toes into stocks and other riskier investments. Depending on the size of your savings, having such a large emergency fund could significantly lower your expected returns, and thus your expected income, but better to crunch these numbers now than later.
Higgins echoed Brakke’s outlook for lower stock market returns over the coming five years and has been recommending alternative investments such as real estate investment trusts. She has also upped her recommendation for retirees’ safe asset bucket, from about five years’ worth of living expenses to seven.
“I think you’ll want at least seven years so you don’t have to panic” at the sight of the next market swoon, she said.
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