Retirement in the New Normal: Part 2
Last week, we talked about plugging the dam of unexpected job loss or furlough. If that is part of your reality in the “new normal”, then that needs to be addressed. This week, we will begin taking a look the first three out of ten things you can do to manage the impacted parts of your retirement strategy.
1. Sequence-of-returns risk
OK, so what am I talking about? Sequence-of-return risk, in a nutshell, is the possibility that you will need to take income from your retirement portfolio while it is losing money due to a down market. While we can’t say unequivocally that the pandemic has caused a down market, what I’m focusing on here is the volatility the pandemic causes and the fact that this has affected the portfolios of both pre-retirees and retirees.
Taking steps to protect the value of your retirement savings, while making sure it is well-positioned to recover from any downturns, is even more important in the “new normal”. In a down market, when your advisor sells shares in your portfolio for your monthly retirement income, he will have to sell more shares to get you the same amount of cash. This is an important point to understand because it affects the portfolios ability to earn. With less shares in the portfolio, the ability to compound shares for growth is lower.
What can you do to avoid this scenario? Here are the things I encourage, and help clients do, to manage sequence-of-return risk on their retirement savings.
- Lower your risk by taking less each month while the market is down or volatile.
- Shift the source of your monthly retirement income to the other “buckets” in your retirement strategy that hold cash or less-volatile assets.
- Be strategic about your withdrawals by focusing on cash first, then maturing bonds and CDs, followed by other less-volatile assets.
- Keep at least two year’s worth of expenses, what I call your annual retirement salary, in an easily accessible cash equivalent account.
- Put aside at most another 1-3 years of retirement assets in short-term fixed income products.
2. Raise contributions and lower distributions
This is a pretty simple one, basically max out your retirement contributions if you are still working and don’t make any unnecessary withdrawals right now
The government has actually done a few good things to help you implement this suggestion.
- The IRS increased contribution limits for 401(k)s in 2021, bringing allowable contributions to $19,500 and catch-up contributions to $6,500 for those 50 years and older.
- For IRAs, as of 2021, you may now contribute up to $6,000. If you are 50 years or older you can also contribute up to $1,000 in catch-up contributions.
- With the creation of the CARES Act, required minimum distributions (RMDs) have been waived allowing you to keep your retirement savings in the market longer and hopefully avoiding that sequence-of-return risk.
3. Review your estate plan
While we’ve talked about making moves to secure your assets, securing where those assets after you pass is also important in the “new normal”. If you have an estate plan it will help organize things in life as well as death and it will help, make sure you and your loved ones are secure.
The best thing to do, whether you have an estate plan or need one, is to meet with an estate-planning attorney.
With your estate attorney you can:
- Make sure your beneficiaries and all your estate planning documents are updated.
- Create a gifting strategy for your assets.
- Review your legacy and the organizations and causes you care about and consider your charitable giving options.
We have covered just a few parts of a complete retirement strategy. As we continue this series, we will look at more pieces of the strategy that should be reviewed from the “corona-perspective” and discuss ways to combat “corona-damage” to your retirement savings and timeline.
If you find yourself in a precarious position due to this corona-economy, I strongly recommend you speak with us right away to see exactly how retirement ready you are and to learn what can be done to ensure your retirement is the pure bliss you imagine it to be.
P.S. If you enjoyed what you've read here and found it beneficial, we encourage you to share it with your friends and family. I firmly believe that an educated investor is more confident, which leads to healthier finances and fewer sleepless nights.
Until next time...