The summer's stock market volatility raises a difficult question for new retirees and those about to join them.
If studies show that one of the worst things that can happen to a retiree is a significant bear market early in the journey, what can be done to salvage a portfolio?
After all, older investors are frequently told they will need to keep more of their portfolios in stocks to help finance what may be lengthy retirements.
But that runs counter to our risk-averse nature as we age, said Ray LeVitre, a financial planner with Net Worth Advisory Group in Midvale, Utah.
And with stocks' prospects uncertain after a more than four-year bull run, new retirees need to start thinking about what to do if they find themselves in a prolonged negative market early on, LeVitre said.
Of course, a big shock to the portfolio could mean you will have to alter your desired spend-down plan and cut expenses, perhaps by downsizing your home a little sooner or relocating to a lower-cost area.
And if you're healthy enough and employable, it could mean a trip back to the work force to help cover living expenses while your portfolio recovers from the downturn.
You might also alter the timing of taking Social Security benefits. Taking money sooner could help with cash flow while your stocks recover from a market plunge. Of course, the trade-off could be lower total income if you outlive life expectancy.
But there also are ways to manage your nest egg to mitigate potential market losses.
Having a balance of stocks and fixed-income investments to meet your needs for income and portfolio growth, and then laddering them according to your retirement timeline, will help insulate your money from market volatility, he said.
Some investors prefer to allocate their stock and bond mix according to rules of thumb about their age. That theory once held that investors should put a percentage of their portfolio equal to their age in bonds and cash.
Because of longer retirements and a heavier projected reliance on personal savings for retirement instead of pensions, however, that rule of thumb has shifted a bit. Today, many experts say investors should subtract their age from 110, and invest that percentage in stocks.
So 65-year-olds would shoot for 45 percent in stocks. Instead of 65 percent bonds and cash, under the previous theory, they would have 55 percent.
A more precise way to think about allocating your money is to instead chart the timeline for when you'll need to tap certain investments, LeVitre said.
This requires some rearranging of money as you approach retirement and move from accumulating to spending.
For clients in retirement, he divides nest eggs into three chunks. The first pot is filled with funds needed for living expenses in the next two years. That money is placed in money-market accounts or laddered certificates of deposit, timed to come due as necessary to meet spending needs.
The next group is money you will need in the subsequent six to seven years. This money is invested in bonds, he said.
Finally, the remainder of the portfolio is invested in stocks for growth.
By laddering the investments, your portfolio may have a fairly high percentage invested in the stock market, but you won't sell in a panic because you don't need your money from stocks for several years, LeVitre said.
It's a good idea to compare your asset allocation using both the laddered and age-oriented methods to see if there's a substantial difference, he said.
For example, if you have a large nest egg, the laddered approach might mean you'll end up with a high percentage in stocks overall, and you may want to dampen down that weighting if you're risk averse.
Likewise, small portfolios that need a lot of investment growth during retirement in order to provide sufficient income might need to be tweaked by shortening up on the number of years of more guaranteed income.
But the approach at least gives a mental buffer that helps a lot of clients weather financial storms, LeVitre said.
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