By Mark Connely, CFP
The anxiety weighing on many investors around the economic and market uncertainty from the COVID-19 pandemic is particularly felt by those in or near retirement. Ultimately the resolve, dedication, and discipline we display now will play a large part in our long-term financial outcomes. However, that may be little comfort for those following Wall Street’s wild swings on a daily basis.
If you are close to retirement, here are some important discussions you should be having with your advisor during these uncertain times:
Is the 4% Rule Still Valid?
Many studies support taking 4% from your investment portfolio each year as a practical solution to have adequate retirement income while protecting against inflation and the fear of outliving your savings. If we are working with a $1,000,000 portfolio, many studies say you could withdraw $40,000 a year without worrying about running out of money.
The reality is that many Americans have not saved nearly enough to enjoy a financially comfortable retirement using this rule. With many retirees and pre-retirees moving into assets such as cash, CDs, or bonds, the current low interest rate environment further exacerbates the problem. Your choices then become a) learn to live off of less money, which many people do and still enjoy a happy life, b) take a higher percentage knowing that you are drawing down your assets, or c) find a way to supplement your income.
If you decide to roll the dice and go with the second option by withdrawing more than four percent, your nest egg will likely dwindle faster than expected over time. Annuities can offer an alternative. In effect, you are creating your own personalized plan with a guaranteed income stream over your life and even your spouse's life.
In exchange for the higher payout and financial confidence offered by an annuity, you may end up leaving less for your heirs, depending on the structure you choose.
Some individuals might choose to incorporate permanent life insurance into their retirement income planning strategy as one way to offset this concern. While term life insurance is often promoted as the more economical solution, permanent life insurance can allow you to take higher payouts from other assets now with the knowledge that you can still leave your spouse or heirs a financial cushion when you pass. Having permanent life insurance provides a new set of options, and surprisingly a lot of retirees are finding it can actually be affordable in the scheme of a larger financial plan even in later years of life.
Investment Strategies For The Long Haul
Another key element for those nearing retirement is a diversified investment strategy (keeping in mind that diversification does not guarantee profit or protect against market loss). Now may not be the time to experiment with risky financial moves, however, being overly cautious with your investments can have drawbacks as well. While it may seem frightening given current market conditions, it still makes sense for most investors to have a portion of their portfolio in stocks to help beat inflation and spread out your risk.
In my 25-year career, I have seen far too many people concentrate in one asset class, which may leave them vulnerable to market fluctuations. They can potentially lower risks if they further diversify into other asset classes such as international stocks, value plays and small-cap companies. The bottom line is a thoughtfully diversified portfolio --not simply a portfolio where you purchased a random assortment of things -- is the way that you can have a balanced strategy. In this day and age, the properly diversified and mathematically balanced portfolio may not be very sexy, but it can be a winning strategy. Everyone’s situation is unique so it is important to work closely with your advisor to ensure your portfolio aligns with your objectives.
Aligning Your Work With Your Passions
Some individuals who were planning on working longer to bolster savings before going into full retirement are now questioning this strategy, given record unemployment levels. Those close to retirement may not have the option now to continue working at their current job. Some may decide to change careers or start a business that better aligns with their passions. There is actually a world of opportunity that is opening up for these people. Having a frank discussion with your advisor about your options will help you decide what is feasible given your financial situation, family obligations and goals.
Keeping Long-term Goals In Focus
We are all aware that these are not normal times, but eventually we will return to normal and as Warren Buffet says, "When the tide lowers, we'll see who was swimming naked." The strategies you implement with your advisor should serve as the "all-weather tires" they were intended to be and your long-term goals should remain on track as long as the plan that was designed for you is maintained. Rather than reacting to things you cannot control, you can take this time to refine the things you can.
Here are some tips I am using with my clients for managing volatility and bolstering financial security during the COVID-19 outbreak:
- This is the perfect time to conduct a review with your advisor from the comfort of your own home via Zoom. This can also be your opportunity to discuss how your plan is currently structured and how you might be able to better insulate your plan based on how it's being impacted today.
- Keep in mind this is an event that is causing economic volatility, not an event that was caused by economic volatility. The traditional financial indicators for recessions and other instances from the past are not present and the government is stepping in to provide hedges against the long-term impact.
- This can be an opportunity to strengthen your balance sheet through cash infusions and into asset classes that can build more diversity as we prepare to recover from the correction. Having a discussion with your advisor on how you can position your plan for success is critical.
- Take the time you're spending at home to add some productivity to your day and get financially organized to create a game plan with your advisor that ensures you feel empowered about your purpose and your plan.
These are uncertain times and there are many things beyond your direct control. But that does not mean you are helpless; there are still proactive steps you can take to protect your long-term financial health and create financial confidence for your loved ones. Other generations have been through difficult times in the past and have come out better for it – and so will we.
About the author
Mark Connely, CFP® is a Registered Representative and Financial Advisor of Park Avenue Securities, LLC (PAS) Securities products and advisory services offered through PAS, member FINRA, SIPC. Financial Representative of The Guardian Life Insurance Company of America® (Guardian), New York, NY. PAS is a wholly-owned subsidiary of Guardian. Wealth Design Group is not an affiliate or subsidiary of PAS or Guardian. AR Insurance License #1301962, CA Insurance License #0D04370
Past performance is not a guarantee of future results. All investments contain risk and may lose value. Equities may decline in value due to both real and perceived general market, economic and industry conditions.
Material discussed is meant for general informational purposes only and is not to be construed as tax, legal, or investment advice. Although the information has been gathered from sources believed to be reliable, please note that individual situations can vary. Therefore, the information should be relied upon only when coordinated with individual professional advice. This material contains the current opinions of the author but not necessarily those of Guardian or its subsidiaries and such opinions are subject to change without notice.