Retirement plan down because of covid-19? Here’s why you still need stocks in your 401(k).
Sure, bank deposit interest rates are pitiful, but at least they are safe, right?
One of the biggest threats to having enough to live on in retirement is inflation. Another threat is acting out of fear. Panic is as much an investor’s enemy as inflation. As The Washington Post’s New Rules of Retirement explored, the coronavirus economy is causing concern — but you have to fight the urge to flee the stock market.
I asked Christine Benz, director of personal finance for Morningstar, to answer some of the most frequently asked questions from retirement plan investors.
Q: When stock market benchmarks began to drop dramatically earlier this year, many investors were in a panic and worried they should move their money to safer ground, such as bonds. Were they right to be worried?
Benz: We’re all wired differently when it comes to our emotional reaction to market volatility. Younger investors who should be able to tolerate big short-term drops because they have ultralong time horizons can be easily ruffled, whereas older investors with less time to recover from big market shocks can sometimes be incredibly placid. In general, experience tends to make us more resilient in the face of market shocks; we know that stocks usually recover, and we’ve been rewarded for our patience in the past.
But in general, proximity to spending/needing your money should be the main determinant of whether to be worried in market downdrafts. If you’re getting close to retirement (or any other spending goal, such as college tuition or a home down payment), you have good reason to be worried if your portfolio consists mostly or entirely of stocks. That was true in the first quarter, and it’s true today, too.
Even though the market recovered swiftly in the second quarter, there’s always the possibility that stocks could drop and stay down for a long time. The period between 2000 and 2010 is often called “the lost decade” because stocks basically flatlined during that time. That suggests that if your spending horizon is close at hand, it’s smart to have at least some of your near-term spending needs in safer investments, such as cash or bonds.
On the other hand, stocks have been quite reliably positive for time horizons of 10 years or longer. That suggests that investors who have at least a 10-year time horizon until they’ll need to tap their funds can reasonably hold the bulk of their investments in stocks, provided they don’t panic-sell in big market downdrafts.
Q: Experts advised investors to stick to their retirement investment plans and not sell during a downturn. How do people not panic when the market indexes are tumbling?
Benz: One of Vanguard founder Jack Bogle’s best pieces of advice was “don’t peek.” By that, he meant don’t look at your balance when the market is sky-high, because you might be inclined to come away with a false sense of confidence, and don’t look at it when it’s down. You might be tempted to panic.
But while doing nothing is definitely better than panic-selling, those big market swoons can also be an excellent time to step up and put more money to work in stocks. Your dollars go further because stocks are effectively on sale. That’s not to say that you should go 100 percent into stocks at those junctures. But if you’re not too rattled by the volatility, market drops can be a good time to take a look at your portfolio’s mix of stocks, bonds and cash and compare it with your target mix of assets. If your allocation to stocks has dropped below your target — for example, you’re targeting 70 percent in stocks, and your portfolio’s allocation is just 60 percent — you can use that as an impetus to top up stocks, either by bumping up your allocations to them and/or by peeling back safer securities, which typically hold their ground when stocks fall.
If that all sounds terribly manual — and it is — there’s good news: All-in-one funds such as target-date funds, as well as robo-advisers and human financial advisers, will typically handle that kind of asset allocation maintenance, called “rebalancing.”
Q: How should you invest if you are retired?
Benz: I like the idea of using proximity to spending and planned spending amounts to determine how much risk to take in a retirement portfolio. Spend some time determining how much you can safely withdraw from your portfolio per year without running out prematurely — a starting withdrawal amount of 3 percent or 4 percent is usually considered a “safe” withdrawal amount. Then park the next few years’ worth of those withdrawals in very safe assets such as cash; you won’t gain much, but you won’t lose much, either. Money for another five or eight years’ worth of withdrawals can go into high-quality bonds or bond funds, where you can potentially pick up a slightly higher return than you can on cash, albeit with a bit more risk of losses.
Finally, for funds you don’t expect to need for another decade, those can reasonably go into stocks. After all, stocks have been pretty reliably positive over various 10-year increments in market history, landing in positive territory about 90 percent of the time.
Reader Question of the Week
If you have a personal finance or retirement question, send it to [email protected]. In the subject line, put “Question of the Week.”
Q: We were not expecting a stimulus check. But there’s a pretty good chance we threw away the prepaid stimulus debit card. Is there a website where I can find out if one was mailed to us?
A: You would not be alone in thinking the mailed stimulus debit card was junk mail or a scam. Many people thought the same thing and tossed their cards.
The cards, sent in May and June, were issued by MetaBank and came in a plain envelope from Money Network Cardholder Services.
Fortunately, there is a way to order another card. Here’s how.
Retirement Rants and Raves
I’m interested in your experiences or concerns about retirement or aging. You can rant or rave. Send your comments to [email protected]. Please include your name, city and state. In the subject line, put “Retirement Rants and Raves.”
Raymond Brandwein of Albuquerque had a rant and some raves about retirement.
Brandwein’s rant: “I’ve been retired from the federal workforce for almost 26 years. My principal rant is that I have been living on a ‘fixed income’ for this entire period. Increases in my annuity are based on overall increases in consumer prices, and these increases are largely offset by increases in insurance premiums and Medicare premiums.”
Brandwein’s rave: “My wife and I have always lived within our income, so we have a decent-size ‘nest egg’ and no debts of any kind, aside from recurring utility and household bills. The biggest rave is our health insurance coverage. I carried my Blue Cross Blue Shield high-option insurance over into retirement, and we both signed up for Parts A and B of Medicare when we reached age 65. In recent years, I have been experiencing more health problems, increasing in both frequency and severity. I [recently] received more statements from Blue Cross Blue Shield for medical expenses for the first several months of 2020. My out-of-pocket cost (aside from the insurance premiums) is zero. Can’t get any better than that.”
Brandwein’s final rave: “Fortunately, my wife and I traveled fairly extensively in the earlier years of our retirement, both domestically and internationally. While there are still places we’d like to visit, we realize at this late date (I’m 84, my wife is 76) that the coronavirus and my own infirmities are going to severely limit future travel for us. But we have no regrets; we visited all the places that were high on our list, and we’re more than willing to forgo the hassle of long-distance travel, especially air travel, in the current climate. I’d conclude that our glass is well over half full, some of it due to our careful planning of finances, some of it due to just dumb luck.”