Dear Quentin,
We are a healthy retired couple (69 and 64 years old). We have always managed our investments ourselves.
We currently have 60% in equities and 40% in cash equivalents in our investment portfolio. Based on “100 minus your age rule“We would be considered overweight in equities; even with the new version of ‘120 minus your age’, we are pushing the bar. However, we continue to do the math and do not understand what we may be missing.
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Our total net worth is $4.2 million. We have $300,000 in non-retirement funds (60% cash), $1 million in a house, retirement accounts with $1.1 million in CDs, and $1.8 million in retirement funds. actions. We have no debt and live comfortably on $150,000 a year. My husband will start receiving Social Security of $55,000 per year in 2025 and I will receive $28,000 in 2027.
In the worst case scenario, we fear a stock market crash. This could happen, or at least a significant slowdown. In this case, we have over 10 years of liquidity that we can draw on as the market recovers. Alternatively, we could continue to benefit from market growth and gradually reduce the percentage of equity ownership as we age.
Please let me know what I may have missed in our thinking.
Healthy baby boomers
Dear healthy baby boomers,
Ten years is a long time to get over a stock market crisis.
Let’s talk about your worst nightmares first. After the stock market crash of 1929, when the stock market ultimately lost about 90% of its value, the Dow Jones Industrial Average DJIA took more than 25 years (November 23, 1954) before closing above the level at which it had closed at that fateful moment. day. But analysts say it took five to ten yearsexplaining deflation.
One of the many lessons of the Great Depression (and the financial crash of 2008) is that one man’s meat is another man’s tofu, where one person sees stability, another expects chaos. Yale economist Irving Fisher said stock prices had reached “what looks like a permanently high plateau,” according to this report from October 16, 1929 in the New York Times.
In the meantime, in a newsletter on March 25, 1929, the Federal Reserve warned that “excessive or too rapid growth in any area of credit, whether commerce, industry, agriculture, or the securities business , is a matter of concern for the Federal Reserve System. Too rapid an expansion of bank credit in any area can cause serious financial disorganization…”
It took more than five years for the market to recover from the 2008 financial crisis, which was caused in part by predatory and subprime lending in the mortgage market and a lack of financial regulationDiversification is also key to weathering such storms: many companies survived the financial crises of 1929 and 2008 and, yes, some did not.
The complexities of a cash cushion in retirement
You have no debt and your Social Security will provide you with an income of $83,000 per year, more than half of your pre-retirement expenses, not including your $2.9 million in retirement and CD accounts. Plus, you don’t have a mortgage. You’ve worked hard and planned wisely for a comfortable retirement and peace of mind. You can afford both.
Some people who write in this column compare and despair. You don’t have this problem, so you can worry less about what you may or may not have missed. Last year, the average retirement income for adults aged 65 and older was $83,085 after adjusting for inflation, according to Retireguide.com. And the median income? That’s $52,575 per year.
For those reading this, you must also be 62 to qualify for Social Security spousal benefits or have a child under 16 or already receiving Social Security. The amount also depends on whether the higher-earning spouse started claiming a pension at age 62 or waited until full retirement age. (It sounds like your husband is waiting until he’s 70).
Now that I’ve congratulated you, which seems appropriate under the circumstances, let’s talk about the $67,000 shortfall, which represents 2% of your portfolio, according to Paul Karger, co-founder and managing partner of TwinFocus, a financial advisory firm. heritage. “This should be easily achievable given current rates and a balanced portfolio approach across stocks and bonds,” he says.
Given your current stock and cash allocation, age, and risk profile, you have essentially protected yourself against a significant stock market decline. “We advise using taxable funds to cover any shortfalls before dipping into your retirement accounts, given the tax-advantaged nature of your retirement assets,” says Karger.
He has one caveat: “We suggest starting to chip away at some longer-duration bonds, perhaps Treasuries,” he adds. “Although short-term bonds and money market funds offer attractive returns, and in many cases, higher returns than longer duration bonds due to the yield curve inversionthis could prove to be a shorter-term phenomenon,” adds Karger.
Since most of your wealth is in retirement accounts, this means that distributions will be taxed as they are withdrawn. “This diminishes available after-tax funds and requires a thoughtful distribution strategy to minimize the amount of taxes paid each year,” says Michele Martin, president of wealth management firm Prosperity in Minneapolis, Minnesota.
Increase the amount of your fixed income investments – your stock And bond allocation – will create a “smoother journey” over time, she says. Martin suggests creating a more diversified allocation to bonds and fixed income investments. “If interest rates fall, the return on cash will gradually decrease and this is defined as reinvestment risk,” she adds.
“The distribution method is the opposite of cost averaging,” says Martin. “When you make distributions to your portfolio during market declines, the impact is amplified. A more conservative portfolio that creates recurring income actually provides a similar overall return to a more aggressive portfolio because it moderates the decline in volatile market conditions.
In other words, you have mastered the “accumulation” part of your retirement plan and now it is time to focus on the “distribution” strategy. Bottom line: Martin says a high-level 60/40 asset allocation is sufficiently diversified given your age, and it may not be necessary to reduce the amount of stock exposure if you are comfortable with the variability of investment returns.
How will the current stock market “bubble” end?
About this potential stock market crash. Only stock columnists, economists, analysts and psychics should make predictions and I do not give odds based on any of the aforementioned parties. These predictions Compiled by State Street Associates, based on research by Harvard University professor Robin Greenwood, estimate that this result is low.
MarketWatch columnist Mark Hubert predicts that the current stock market bubble end with slow deflation rather than a bang. He does not predict a so-called crash – defined by some economists as a 40% fall in prices over the next two years. He recently wrote about the “huge return differential” between the cap-weighted S&P 500 SPX and the equal-weighted version.
“So far this year, the market cap-weighted index (the one cited daily in the financial press) has outperformed the equal-weighted version by more than 10 percentage points,” he adds. “Last year, the outperformance of the market-cap-weighted version was more than 12 percentage points.” (The equal weight version gives each company the same weight, regardless of its size.)
“This difference suggests that the performance of the market-cap-weighted version is increasingly dependent on the largest stocks in the index, and many analysts believe that such concentration is a sign of an unhealthy market that is particularly vulnerable to a decline,” Hubert adds. “But my analysis of the data since 1970 does not support this.” He favors whimpers over crashes.
So enjoy these peaceful years and send us all a postcard.
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