Dear Quintin,
We are a healthy, retired couple (69 and 64 years old). We have always managed our own investments.
We currently have 60% stocks and 40% cash equivalents in our investment portfolio. Under the “100 minus your age” rule, we would be considered overweight in stocks; even under the most recent version of “120 minus your age,” we are above that figure. Yet we keep doing the math and can’t figure out what we might be missing.
Most Read MarketWatch
Our total net worth is $4.2 million. We have $300,000 in non-retirement funds (60% cash), $1 million in a home, retirement accounts with $1.1 million in CDs, and $1.8 million in stock funds. We have no debt and live comfortably on $150,000 a year. My husband will start collecting Social Security at $55,000 a year in 2025, and I will collect $28,000 in 2027.
In the worst case scenario, we fear a stock market crash. One, or at least a significant recession could occur. In that case, we have over 10 years of cash that we can draw on as the market recovers. Otherwise, we could continue to benefit from market growth and slowly reduce our share ownership percentage as we age.
Please let me know what I may have left out of our consideration.
Healthy Boomers
Related: “It’s the saddest thing”: I’m happily retired and my 60-year-old friends want to know how I did it. Should I tell them my secret?
Dear Healthy Baby Boomers:
Ten years is a long time to overcome a stock market crisis.
Let’s deal with your worst nightmares first. After the market crash of 1929, when the stock market ultimately lost approximately 90% of its value, the Dow Jones Industrial Average DJIA took more than 25 years (November 23, 1954) before closing above the level at the one that closed that fateful day. But analysts say it actually took five to 10 years, taking deflation into account.
Among the many lessons of the Great Depression (and the 2008 financial crisis) is that what is food to one person is tofu to another: Where some see stability, others expect chaos. Yale economist Irving Fisher famously said that stock market prices had reached “what seems like a permanently high plateau,” according to this October 16, 1929, article in the New York Times.
Meanwhile, in a March 25, 1929, bulletin, the Federal Reserve warned that “excessive or too rapid growth in any field of credit, whether commerce, industry, agriculture, or securities trading, is a cause for concern to the economy.” Federal Reserve System. Too rapid expansion of bank credit in any field may result in serious financial disorganization…”
It took the market more than five years to recover from the 2008 financial crisis, caused in part by predatory and subprime lending in the mortgage market and a lack of financial regulation. Diversification is also key to weathering those storms: Many companies survived the 1929 and 2008 financial crises, and, yes, some did not.
The Complexities of a Retirement Cash Cushion
He has no debt, and his Social Security will provide him with an income of $83,000 a year, more than half of his pre-retirement expenses, not counting his $2.9 million in retirement accounts and certificates of deposit. He also has no mortgage. He has worked hard and planned wisely ahead for a comfortable retirement and peace of mind. He can afford both.
Some people who write to this column compare and despair. You don’t have that problem, so you can worry less about what you may or may not have lost. The median retirement income for adults age 65 and older last year was $83,085 adjusted for inflation, according to Retireguide.com. And the average income? That’s $52,575 a year.
For others reading this, you must also be 62 to claim Social Security spousal benefits or have a child who is under 16 or already receiving Social Security. The amount also depends on whether the higher-earning spouse started claiming at age 62 or waited until full retirement age. (It seems her husband is waiting until he turns 70.)
Now that I’ve congratulated you, which seems appropriate given the circumstances, let’s talk about the $67,000 shortfall, which is 2% of your portfolio, according to Paul Karger, co-founder and managing partner of TwinFocus, a wealth advisory firm. “This should be easily achievable given current rates and a balanced portfolio approach of stocks and bonds,” he says.
For the most part, he has protected himself against a major stock market decline, given his current allocation of stocks and cash, and his age and risk profile. “We advise using taxable funds to cover any shortfalls before tapping into your retirement accounts, given the tax-advantaged nature of your retirement assets,” Karger says.
He does have one caveat: “We would suggest starting to nibble at some longer duration bonds, perhaps Treasuries,” he adds. “While short-term bonds and money market funds offer compelling yields, and in many cases higher yields than longer duration bonds due to the inversion of the yield curve, this may prove to be a shorter-term phenomenon,” Karger adds.
Since most of your wealth is in retirement accounts, distributions will be subject to taxes as they are withdrawn. “This decreases the funds available after taxes and requires a well-thought-out distribution strategy to minimize the amount of taxes paid each year,” says Michele Martin, president of wealth management firm Prosperity in Minneapolis, Minnesota.
Increase the amount of your fixed income investments (your shares) and The bonus allocation will create a “smoother ride” over time, he says. Martin suggests creating a more diversified allocation to bonds and fixed income investments. “If interest rates fall, the cash yield will fall in unison and that is defined as reinvestment risk,” he adds.
“The mode of distribution is the opposite of dollar-cost averaging,” Martin says. “When portfolio distributions are taken in down markets, the impact is magnified. “A more conservative portfolio that creates recurring income actually provides similar overall performance as a more aggressive portfolio because it moderates the drawdown in volatile market conditions.”
In other words, you’ve mastered the “accumulation” part of your retirement plan and now it’s time to focus on the “distribution” strategy. Bottom line: Martin says a high-end 60/40 asset allocation is adequately diversified given your age and it may not be necessary to reduce the amount of exposure to stocks if you’re comfortable with the variability of investment returns. .
How will the current stock market “bubble” end?
About that possible stock market crash. Only stock market columnists, economists, analysts and psychics should make predictions and I am not giving probabilities based on any of the aforementioned parties. These predictions compiled by State Street Associates, based on research by Professor Robin Greenwood of Harvard University, rate that outcome as low.
MarketWatch columnist Mark Hubert predicts that the current stock bubble will end with a slow deflation rather than a burst. He does not foresee a crash, defined by some economists as a 40% drop in prices over the next two years. He recently wrote about the “huge return differential” between the cap-weighted S&P 500 SPX index and the equal-weighted version.
“So far this year, the capitalization-weighted index (the one cited in the financial press every day) has outperformed the equally-weighted version by more than 10 percentage points,” he adds. “Last year, the capitalization-weighted version outperformed by more than 12 percentage points.” (The equally-weighted version gives each company equal weight, regardless of size.)
“This difference suggests that the performance of the capitalization-weighted version has become increasingly dependent on the largest stocks in the index, and many analysts believe that such concentration is a sign of an unhealthy market that is especially vulnerable to a decline. ”Adds Hubert. “But my analysis of the data since 1970 does not support this.” It leans more towards the moaning side than the falling side.
So enjoy these happy years and send us all a postcard.
More columns by Quentin Fottrell:
“They are cheating on my mother”: she “fell madly in love” with a man through Facebook. How can I convince her that she is a scam?
‘We live on a fixed income’: My husband and I are retired. We were invited to our niece’s destination wedding. Are we required to buy a gift?
“I don’t live extravagantly”: I have $68,000 in credit card debt and $50,000 in a 401(k). How can I get out of this trap on a $55,000 salary?