By Jaime Quiros, CFP®
In November 2016, I remember carrying my three-month-old daughter late into the evening of election night. I told my wife not to worry and that I would be on duty that night. The markets had been caught off guard and equity futures were plummeting. Futures triggered built-in market circuit breakers and trading was halted. Even as an experienced professional, this can be quite stressful. While I had no idea what to expect going into the office that next day, our process of constantly reviewing our clients’ portfolio allocations, equity positions, and long-term planning provided an investing discipline that put me at ease. Although anxiety was at its highest in the morning, something unexpected happened. The market took a turn, and the Dow index closed on a high.
That experience only confirmed what I knew but sometimes need a reminder of: Markets are unpredictable. However, having the right plan, strategy, and team can make all the difference. If you are thinking about retiring, then it could be the difference between retiring confidently or retiring with worry.
With this in mind, as we continue forward from election day, here are three action items that you should do to mitigate sequence risk — the danger of retiring in a down market, where the early withdrawals affect the longevity prospects of the portfolio.
Plan Your Budget
As a conservative measure, plan on having the same budget at retirement as you had while you were working pre-COVID-19. Your budget will vary depending on whether you will take it easy in retirement or start travelling more. Consider, what are your plans at retirement? The answer to this is a lot different now than it would have been nine months ago. I realize that while we are amid a pandemic, it is going to be tough to travel, but eventually, travelling will get easier. There will also be more activities, events, and hobbies that will cost money. So while we are in the pandemic, sure your needs may be lower, but it is better to have that cushion between your budget at retirement and your actual expenses pre-retirement.
In addition, make sure you still have your emergency fund, which is anywhere between six to nine months of monthly expenses. This will help you to plan for the unexpected. If the heater goes, the roof needs fixing or your pet needs a visit to the vet, you will have the budget to do so. The truth is that your spending is going to fluctuate the first couple of years of retirement as you settle in. Right now, the pandemic will dictate some of the fluctuation. However, this too will pass. Once it does, plan to closely monitor your spending.
Plan Your Income
Once you have your budget, look at your income and where it is going to come from. Do you have a pension? Are you planning to leverage Social Security? Is all your income going to come from your 401k, or do you have after-tax dollars too? What does your income look like before you start your required minimum distributions? Should you consider some ROTH conversions?
While you sum up all your income streams make sure you take taxes into consideration. For planning purposes, it is better to be safe here as well, as $1 million in a tax-deferred account is much different than $1 million on an after-tax basis.
When planning your income, there are many different variances, which will depend on your situation. If all your income will come from savings, what percentage of your portfolio is that? How much equity exposure are you taking? It’s very important to check your allocation – equity vs. fixed income, types of holdings, target equity exposure, etc. As long as you know what your exposure is and it fits your risk preference, market volatility will be palatable. And the good news for any election period is that the markets are not affiliated with a political party.
There are a few additional things to keep in mind while you review your holdings: Do you have a lot of appreciated stock that you plan to donate? What types of companies are you invested in? What sectors are you favoring? The answers to these questions will help provide further guidance as you plan your income.
Compare Your Budget and Income
Now that you have planned both your budget and income, model the scenario to make sure your expected budget is sustainable by your portfolio. In other words, can your portfolio handle the level of withdrawals for the long haul? Ideally, your income will cover your expenses. If this is not the case, you need to figure out next steps. Do you need to take more equity risk? Do you need to postpone retirement?
If your income covers your expenses, your job then becomes monitoring your expenses and portfolio to make sure you are still following your plan. Early on, you may find that you need to revisit your plan quarterly, but once you are in the groove of retirement and your expenses have settled, you may find that revisiting the plan annually is plenty.
Doing this exercise will give you a good idea of what retirement looks like for you regardless of who is in office. Remember, once you have a plan, you just need to stick to the plan. Here are some final tips: Do not over-rely on static calculators; be conservative with assumptions, especially the impact that inflation can have (a stamp or gallon of milk will most likely be more expensive tomorrow than it is today); and I can’t say it enough, make sure you are taking taxes into consideration. If you are having trouble or if this seems overwhelming, then it is a good time to reach out to a financial advisor and start the discussion. What is great is that the initial consultation is often complimentary.
Knowing what I know from the 2016 election and given that my youngest is now two years old, I was able to go to bed early on November 3.
About the author: Jaime Quiros, CFP®
Jaime Quiros, CFP®, is a portfolio manager at FBB Capital Partners in Bethesda, Maryland. He is also registered with the National Association of Personal Financial Advisors, and he serves as a board member of Life Asset and the Washington Health Initiative. His experience in financial services spans equity trading, market making, portfolio management and private client lending.