A subscriber to TheStreet's new premium publication, Retirement Daily, recently wrote to us: "What is the best thing to do with a 401(k) if the market keeps crashing or we go into another recession when I only have a few more years to go before retiring? I need to minimize losses at this point."
On Thursday, we brought you Part 1 of this column, What to do With Your Retirement Portfolio in This Volatile Market.
In that story I offered up my response as well as the ideas and suggestions from from several of our best sources: Kerry Uffman, Owner, TWRU Private Wealth Management; adviser Mitch Fryling; and Dirk Cotton, Financial Planner, The Retirement Café.
Today, in Part 2, we're bringing more analysis and strategies from Dana Anspach, Founder and CEO, Sensible Money; Michael Lonier, CEO, Lonier Financial Advisory LLC; and Keith Whitcomb, director of analytics, Perspective Partners.
(Read Bob's answer and more, here, about the systematic withdrawal plan or a what advisers refer to as a SWP or SWIP; the four-box strategy and the bucket strategy to get a better idea of what's best for you and how to find the right financial adviser to work with.)
Now let's hear more from some of the best advisers available.
Dana Anspach, Founder and CEO, Sensible Money
As you get closer to retirement, it is important to have a plan in place to make sure your funds will be there for you. The best approach you can take is to figure out how much of your money you'll need to use in the near-term. Let's say you know you'll need to withdraw $20,000 a year from your 401(k) plan starting in four years when you retire. If you move $100,000 of your 401(k) money into a safe option inside your plan, like a stable value fund, money market, or short-term bond fund, then your first five years of withdrawals are secure. That means the portion remaining in the equity market has nine years to work for you before you need to use it. Historically, nine years buys you enough time to ride out any market crash.
It also helps to make a distinction between market volatility and a market crash. You should expect market volatility. It is normal. You should also expect market crashes, although they occur less frequently than normal volatility. To avoid a market crash in a way that leaves you in a better place than riding it out requires you to be able to foresee both the peak of the market, so you can sell at that time, and the bottom, so you can buy back in. Not even the most educated and highly paid professional investment managers in the country can consistently do this. If you try to time the market the odds are you'll cause more harm to your long-term success than good. Rather than timing the market, it's better to have put the money you need in the next five to 10 years in safer options. That way you don't have to worry about the month-to-month ups and downs of the stock portion.
Michael Lonier, CEO, Lonier Financial Advisory LLC
My planning depends upon an analysis of a client's full household balance sheet and an understanding of their whole financial situation, goals, and resources. So yes, there is some concern about how a 401(k) -- or any portfolio or account -- should be allocated entering into the retirement red zone 5 to 7 years before retirement. But the proper answer depends upon the full balance sheet and financial status.
In other words, someone nearing retirement should be developing a comprehensive retirement plan that balances the potential for loss against the need to fund retirement expenses over potential 30-year retirement. The more assets you have, say $1 million and above, the more important a well-constructed comprehensive plan becomes because sub-optimal choices can be very costly. Tax optimization and planning Roth conversions before claiming Social Security, for example, might save hundreds of thousands of dollars in taxes, while allowing a solid, safe allocation to risk-free assets to fund lifestyle expenses.
Unfortunately, if savings are limited, say a few hundred thousand dollars in a 401(k), the choices are also limited. Hopefully the plan has a low-cost well-managed retirement target date fund, say from Vanguard or T. Rowe Price. Stick with that, or put the bulk of the account into a stable value fund if one is available, with some amount into a broad stock index for long-term growth. Buy more -- don't sell -- when the market drops. That's when it's on sale and will provide the highest long-term returns.
Keith Whitcomb, Director of Analytics, Perspective Partners
Understand your financial needs in retirement. If you are four years away from retirement, you should have a good idea of what your budget will look like. Will you have any debt? Are you going to downsize to a less costly home? Will you move to a lower-cost state?
Discretionary versus non-discretionary expenses: Planning to spend on a vacation versus making the payment on a home is very different. You will need to have stable sources of income for non-discretionary needs, and an attitude of flexibility for the discretionary ones.
Look at all of your financial resources: Home with available equity? A HECM may make sense. Social Security benefits? Defined-benefit plan? Other assets (IRA traditional or Roth, brokerage, bank CDs, etc.)? Make sure you consider all your available resources when planning for your retirement.
Draw-down strategy: Determine the most advantageous way to time when you will draw on your resources. Budget how much you will need from each source and when you will use it. You may be able to avoid using 401(k) assets in the event of a market down turn if can draw on other funds.
Invest appropriately: Once you have determined a draw-down strategy, you may discover that your 401(k) may need to continue to have exposure to a longer-term growth oriented asset allocation. Riding out a market downturn could be part of the bigger plan.
If you need help, seek out the counsel of a financial adviser.
Got questions about the new tax law, Social Security, Medicare, retirement, investments, or money in general? Email Robert.Powell@TheStreet.com.
It's never too late -- or too early -- to plan and invest for the retirement you deserve. Get more information and a free trial subscription to TheStreet's Retirement Dailyto learn more about saving for and living in retirement. Got questions about money, retirement and/or investments? Email Robert.Powell@TheStreet.com.
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