Dear Quentin,
We are a healthy, retired couple (69 and 64 years old). We have always managed our own investments.
We currently have 60% in equities and 40% in cash equivalents in our investment portfolio. Based on the ‘100 minus your age rule’ we would be considered overweight in stocks; even with the newer version of ‘120 minus your age’ we push it. However, we continue to calculate and do not understand what we may be missing.
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Our total assets are $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 stock funds. We have no debt and live comfortably on $150,000 a year. My husband will start receiving Social Security at $55,000 per year in 2025 and I will receive $28,000 in 2027.
In the worst case, we fear a stock market crash. There could be a situation, or at least a significant downturn. In that case, we have more than a decade of cash to draw on when the market recovers. Otherwise, we could continue to benefit from market growth and slowly reduce our share ownership percentage as we get older.
Please let me know what I may have left out of our consideration.
Healthy Boomers
Related: ‘It’s the saddest thing’: I’m happily retired and my friends in their 60s want to know how I did it. Should I tell them my secret?
Dear healthy boomers,
Ten years is a long time to weather a stock market crash.
Let’s address your worst nightmares first. After the 1929 market crash, when the stock market ultimately lost roughly 90% of its value, it took more than 25 years (November 23, 1954) for the Dow Jones Industrial Average DJIA to close above the level it was closing at that fateful day. But analysts say it actually took five to 10 years, which explains the deflation.
One of the many lessons from the Great Depression (and the 2008 financial crisis) is that one man’s meat is another man’s tofu, with one person seeing stability while another expecting chaos. Famed Yale economist Irving Fisher said in this October 16, 1929 report in the New York Times that stock prices had reached “what appears to be a permanent high plateau.”
Meanwhile, the Federal Reserve warned in a March 25, 1929 bulletin that “excessive or too rapid growth in any area of credit, whether commerce, industry, agriculture, or securities dealing, is a concern to the Federal Reserve system. Too rapid an expansion of bank credit in any area can lead to 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 regulation. Diversification is also essential to weather such storms: many companies survived the financial crashes of 1929 and 2008 and yes, some did not.
The complexity of a financial buffer during your retirement
You have no debt, and your Social Security provides you with an income of $83,000 a year, more than half of your pre-retirement expenses, not counting your $2.9 million in retirement accounts and CDs. Plus, you have no mortgage. You have worked hard and planned wisely for a comfortable retirement and peace of mind. You can afford both.
Some of the people who write to this column compare and despair. You don’t have that problem, so you can worry less about what you may or may not have missed. The average retirement income for adults 65 and older was $83,085 last year after adjusting for inflation, according to Retireguide.com. And the median income? That’s $52,575 a year.
For others reading this, you also have to be 62 to claim Social Security benefits for spouses or have a child under 16 or already receiving Social Security. The amount also depends on whether the higher earning spouse started claiming benefits at 62 or waited until full retirement age. (Sounds like your husband is waiting until he is 70.)
Now that I’ve congratulated you, which seems appropriate given the circumstances, let’s talk about the $67,000 shortfall, which amounts to 2% of your portfolio, according to Paul Karger, co-founder and managing partner of TwinFocus, a wealth advisory firm. “This should be easily achievable given current interest rates and a balanced portfolio approach to stocks and bonds,” he says.
You’ve largely protected yourself against a major stock market downturn, given your current allocation of stocks and cash, and your age and risk profile. “We recommend using taxable funds to cover any shortfall before you tap into your retirement accounts, given the tax-advantaged nature of your retirement assets,” Karger says.
He has one caveat: “We would suggest starting to nibble on longer-term bonds, perhaps government bonds,” he adds. “While short-term bonds and money market funds offer attractive returns, and in many cases higher returns than longer-term bonds due to yield curve inversion, this may prove to be a shorter-term phenomenon,” Karger added. .
Because most of your assets are in retirement accounts, this means that distributions are taxed as soon as they are withdrawn. “This reduces the after-tax funds available 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 your amount of fixed income investments: your shares And bond allocation — will create a “smoother ride” 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 fall in step with it, and that’s defined as reinvestment risk,” she adds.
“Distribution mode is the opposite of dollar-cost averaging,” Martin says. “When you take distributions out of your portfolio in down markets, the impact is magnified. A more conservative portfolio that generates recurring income actually delivers similar returns to a more aggressive portfolio because it moderates the pullback in volatile market conditions.”
In other words, you’ve mastered the “accumulation” portion of your retirement plan and now it’s time to focus on the “distribution” strategy. Bottom Line: Martin says a high-level asset allocation of 60/40 is sufficiently diversified given your age, and it may not be necessary to reduce the amount of equity exposure if you’re comfortable with the variability of investment returns.
How will the current stock market bubble end?
About that potential stock market crash. Only stock market 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, rate such an outcome as low.
MarketWatch columnist Mark Hubert predicts that the current stock market bubble will end with a slow deflation rather than a bang. He doesn’t foresee a so-called crash — defined by some economists as a 40% drop in prices over the next two years. He recently wrote about the “huge yield gap” between the cap-weighted S&P 500 SPX and its equal-weighted version.
“So far this year, the cap-weighted index (the one quoted daily in the financial press) has outperformed the equal-weighted version by more than 10 percentage points,” he adds. “Last year, the cap-weighted version outperformed by more than 12 percentage points.” (The equal-weight version gives every company the same weight, regardless of size.)
“This difference suggests that the performance of the capitalization-weighted version has become increasingly dependent on the largest stocks in the index, and many analysts believe that such a concentration is a sign of an unhealthy market that is particularly vulnerable to a decline” , Hubert adds. “But my analysis of data since 1970 does not support this.” He opts for a whimper rather than a crash.
So enjoy these beautiful years – and send us all a postcard.
More columns by Quentin Fottrell:
‘My mother is being catfished’: She fell ‘madly in love’ with a man via Facebook. How do I convince her it’s a scam?
‘We live on a fixed income’: My husband and I are retired. We have been invited to our cousin’s wedding. Should we buy a gift?
‘I Don’t Live Extravagantly’: I Have $68,000 in Credit Card Debt and $50,000 in a 401(k). How Can I Get Out of This Trap on a $55,000 Salary?
