If you just retired last year, you were feeling pretty good about things: Stocks kept hitting all-time highs and your portfolio looked as if it could sustain a comfortable lifestyle for years. Or, based on the same set of assumptions, you decided this was the year to finally hang it up and were looking forward to spending time on the people and things you really love.
Oops.
For the third time in the past 20 years, the market has thrown investors, particularly retirees, a wicked curveball. The novel coronavirus and the draconian shutdowns that have come in its wake have sent the economy reeling and stocks plunging—as much as a 34% decline in the S&P 500 from its February 19 all-time closing high.
We’ve rallied from the lows but depending on how long the shutdowns last—and how much permanent damage is done to the economy—we still may not have seen the ultimate bear-market bottom.
Regardless, this is a retiree’s worst nightmare. It’s the dreaded “sequence of returns” risk—by retiring just when the market has tanked, retirees could lock in lower income for years. That’s particularly true if you had way too much invested in stock (80% or more of your holdings) in an effort to “catch up.” Now you may spend the rest of your life trying to catch up with where you were before.
As I wrote here previously, Americans near or at traditional retirement age hold on average roughly 50% in stock. Those people sustained 17% to 20% declines in their overall holdings, not counting any offsetting gains in bondholdings during this time. That’s bad but not disastrous, though the 56% loss the S&P 500 SPX,
So, what do you do now? Retirement Weekly reached out to financial planners and we’ve culled what we regard as the best advice from 15 of them from across the country and present them here in two parts. Every single one of them, of course, advised people to get a financial plan. I agree, but since this is their livelihood and doesn’t give specific advice to readers who don’t have a plan, I’ll mention that here and then move on.
I’ll conclude with some of my own advice. I’m not a certified financial planner but I’ve invested and written about retirement for years and even got a retirement plan done for me. (I’ll deal with financial planning in a future column.) But right now I’ll yield the floor to the planners.
Don’t panic, don’t sell and don’t despair
Everybody tells you this, and it’s almost always true, although I believe there are special circumstances under which it might make sense to sell some stock into bear market rallies. But here’s what the planners say:
“Stop! Do not make financial decisions based on emotions,” says Thomas J. Duffy of Tinton Falls, N.J.
“Don’t make an emotional decision…based on market conditions during a temporary crisis (or, conversely, during a period of temporary euphoria),” writes Benjamin Simiskey of Katy, Texas.
“Don’t sell out of the market,” says Zach Abrams of Cleveland, Ohio. “Losses are only losses if you sell and realize them. Recouping losses once you sell is incredibly difficult.”
Let me jump in and give an example here. Let’s say you had a $ 500,000 retirement portfolio with $ 300,000 in equities, whose value fell by a third. That would leave you with $ 200,000 in equity value and a $ 400,000 portfolio value overall.
Let’s also say you had 3,000 shares in a stock ETF selling at $ 100 at its peak. Those shares now sell for $ 66 each. If you keep them they would have to rise 50% for your equity holdings to reach their previous value (not counting stock dividends and reinvestment).
But if you sell, say, 1,000 shares and have 2,000 shares left at $ 66 each, you’ll raise $ 66,000 in cash and your remaining stockholdings will be worth $ 132,000. In this case, your stock ETF would have to rise 76% for that part of your holdings (including the cash you got from the sale) to reach its previous $ 300,000. And for much of that time you’d have a lot less equity to provide growth to meet future living expenses. That could force you to tighten your belt much more than you expected.
But it’s not all gloomy. “While the market downdraft has wounded investment portfolios, it doesn’t need to be fatal to your retirement plans,” writes Michael Hennessy of Fort Lauderdale, Fla. “But you only get one chance to retire right.”
No pressure, folks: After giving you the “don’ts” in this part, next time we’ll tell you what you can and should do now.
