By Catey Hill
For retirees, this week’s slide has been particularly cruel: After a record rally in October that put many nest eggs back in the black, those portfolios are once again getting punctured.
Unfortunately, most advisers predict the wild swings that began in August to continue through the end of the year, thanks to the debt drama playing out in Europe and plenty of economic headwinds at home. “This volatility may be the new normal,” says Rick Kahler, president of Kahler Financial Group in Rapid City, S. Dak.
Of course, such turbulence can be particularly troubling for retired investors, who are living on a fixed income. And unlike their younger peers, they have much less time to recover from any market losses. Fortunately, financial advisers say there are steps these older investors can take to minimize the risks to their portfolios and, perhaps most importantly, stay calm.
Keep cash on hand
With all of the volatility, most advisers recommend keeping at least some cash on hand. “Take two to five years of cash flow and put it into a money market account or something similar,” says Kahler. “This way, you don’t have to take withdrawals from your nest egg in a down market.” Laura Scharr-Bykowsky, a principal at Columbia, South Carolina-based advisory firm Ascend Financial Planning recommends that retirees keep five years of net living expenses in bank accounts as well as short-term bonds to help guarantee principal regardless of what happens in the market over the next few years.
Add guaranteed-income or safer investments to your portfolio
With all the ups and downs in the market, retirees need to make sure that their asset allocation is in line with their age and risk tolerance,
Kahler says. For pre-retirees and younger retirees, Scharr-Bykowsky recommends moving some cash into individual bonds where principal is protected and a certain rate of return is guaranteed. Lance Reid Scott, president of Bay Harbor Wealth Management in Baltimore says it may also be time to consider an annuity. “These aren’t for everyone,” he says. “Look at the fees and terms to make sure it makes sense for you.” But they do provide guaranteed income, which is appealing in this market, he says.
Before the market crisis of 2008, many financial advisers recommended that retirees could withdraw up to around 7% per year from their nest egg. Today, many pros are recommending as little as 3% or 4%, says Kahler. “Don’t withdraw more than 5%,” he adds – or you’ll risk running out of money as you age.
“First, you need to have a long-term strategy with your adviser that you’re comfortable with,” says Scott. Once you have that, stick to it, advisors say. “We’re doing what we’ve always done — thinking long-term,” says Kahler. The reason: People who try to time the markets typically lose out, he says. Bottom line: Don’t panic even when the markets take a swing.
– AnnaMaria Andriotis contributed to this article.