I’m retired and thinking of getting out of the stock market because I don’t want to deplete my retirement assets. What can I do to protect my savings in a market like this one? –J.D., Massachusetts
The way the market’s been behaving lately I don’t blame you for wanting to simply abandon stocks. But reacting emotionally to wild swings in stock prices could do you more harm than good — and possibly even result in you running through your savings faster than you otherwise would.
So I suggest you try these three moves instead.
1. Gauge the actual impact a crash would have on your retirement stash. No one knows where stock prices are headed. But just in case we are in the initial stages of a bear market, you want to get a sense of just how big a hit your portfolio might actually take in a full-fledged meltdown.
You can’t predict that for sure, but you can get a decent estimate by seeing how your current portfolio would have fared in past major setbacks. Start by totaling up the value of all your retirement investments and calculating what percentage of your holdings are in stocks and what percentage are in bonds. If you own funds or ETFs that own both stocks and bonds, you can get a breakdown of their mix on Morningstar’s Instant X-Ray tool.
Once you know your portfolio’s overall stocks-bonds allocation, you can calculate your potential exposure pretty easily. For example, from the top of the market in late 2007 to its trough in 2009, stocks lost approximately 60% of their value. Bonds, meanwhile, gained about 8% over the same period. So if we see a downturn of similar magnitude in the near future and your portfolio consists of 50% stocks and 50% bonds, you might experience an overall loss of about 26%. A portfolio invested 40% in stocks and 60% in bonds would lose roughly 19%. Of course, the actual loss you might incur could be more or less severe depending on many factors, ranging from how the market actually performs to how often you rebalance your portfolio. But going through this exercise will at least allow you to put a number on the loss you might suffer — and compare it to your risk tolerance — so you’re not relying on pure guesswork.
2. See how changing your asset mix might affect your portfolio’s longevity. If, after going through the above analysis you find your portfolio might lose more than you feel you could handle, your first reaction may be to sell stocks and move more of your money into bonds and cash. Remember, though, that your goal shouldn’t be just to avoid or mitigate temporary losses due to market setbacks. If that were your only aim, you could just keep your entire retirement stash in cash.
But you also want to assure that your nest egg can generate an acceptable level of annual income that will sustain you throughout retirement. And since a more conservative stocks-bonds mix can reduce your potential for long-term gains, putting more of your nest egg into bonds or cash could mean that you’ll end up with less spending money over the course or retirement, or that you’ll run through your savings more quickly.
So before you start selling off stocks or make any other big shifts in your portfolio, go to a good retirement income calculator that uses Monte Carlo simulations and run a few scenarios to see how different mixes of stocks and bonds will affect the probability that your savings will last the rest of your life. If going to a more conservative portfolio still leaves you with an 80%-or-better chance of getting the income you need throughout retirement, fine.
But if dialing back on stocks significantly increases the chances you’ll deplete your savings — or requires you to pare withdrawals from your nest egg to make it last — then you’ll have to arrive at some sort of balance between your desire for short-term protection from market setbacks with your need for lifetime income. If you’re uneasy about doing this kind of number crunching on your own, you might want to have an adviser do the analysis for you.
3. Consider locking in some lifetime income. Going to a more conservative asset mix may be the first move that people consider to prevent a market meltdown from ruining their retirement, but it’s hardly the only option. For example, instead of fleeing stocks altogether or shifting your asset mix more toward bonds and cash, you might also consider putting some, but not all, of your nest egg into an immediate annuity that will provide a guaranteed payout for life.
A 65-year-old man who invests $100,000 in an immediate annuity would receive about $565 a month in lifetime income; a 65-year-old woman would get about $545; and, a 65-year-old couple (man and woman) would receive about $480. Knowing that you can count on that monthly payment regardless of how the market is behaving may help you stick to a stocks-bonds mix that would otherwise make you feel anxious. If you think an immediate annuity might be right for you, you’ll want to check out these tips for how to choose one before you buy.
Another option is a longevity annuity, a type of annuity that for a much smaller upfront investment than you would make with an immediate annuity can deliver sizable monthly checks in the future. The idea is that you part with some of your savings today to assure you’ll still have guaranteed income you can count on down the road, even if you overspend earlier in retirement. For example, a 65-year-old man who invests $25,000 in a longevity annuity would collect about $1,125 a month for life starting at age 85, while a 65-year-old woman would receive about $920 a month.
For quotes for both immediate and longevity annuities based on your age, sex and how much you expect to invest, you can go to this annuity calculator. If you think you’ll fund a longevity annuity with money from an IRA, 401(k) or similar account, you’ll want to be sure it meets the Treasury Department’s criteria for designated QLACs, or Qualified Longevity Annuity Contracts.
Bottom line: When the stock market is going through scary convulsions, getting out as quick as you can may seem like the safest solution. But as emotionally appealing as simply fleeing stocks can be, it can also have serious downsides, making it all the more important to coolly consider other options before you act.