Retirement in Uncertain Times: 5 Tips


You may have noticed our world is changing at an accelerating pace. The pandemic, and now the conflict in Ukraine, cast a shadow of uncertainty over our lives. If you’ve recently retired (or will retire soon), you may feel like the world is shifting beneath your feet just as you begin living on your savings. If you’re concerned about retirement in uncertain times, here are five tips to help you adjust.

1. Replenish Your Cash Reserves

Replenishing your cash reserves may seem obvious, it’s first this list for a reason. Where three months’ worth of living expenses may have been a good amount for most people during their working years, it’s good practice to increase that amount as retirement approaches.

There are plenty of differing ideas about how much cash retirees need. In my opinion, somewhere between six months and one year’s living expenses is the sweet spot. Not too much, not too little. Getting your cash reserves right will dovetail with our next tip.

2. Review Your “War Chest” of Bonds

Along with your cash reserves, the bond allocation in your portfolio represents your “war chest” of reserves to stabilize your investments during market downturns. While some may see bonds as passe in the current low interest rate environment, they do still occupy an important part of your overall investment strategy.

When reviewing your bond allocation, there are two important risks to keep in mind. The first is interest rate risk. When searching for yield, it can be tempting to choose, say, a 30-year bond simply because of the higher interest rate.

However, since bond values always move in the opposite direction of interest rates, it’s important to understand how much they’ll move when rates do change. The longer the duration of the bond, the more it is affected by interest rate movements. If the Fed follows through and increases rates due to inflation, the value of shorter duration bonds will be affected less than longer duration bonds.

The second risk to consider when reviewing your bond portfolio is credit quality. Believe it or not, there are a lot of “zombie” companies out there – these are companies whose revenue can pay the interest on their debt, but not the principal. If you own one of these bonds, you’re taking a huge risk!

These types of bonds are known as “high-yield” or “junk” bonds. The spread in yield between high-quality bonds and junk bonds isn’t worth the risk in the current environment, in my opinion. High-yield bonds can also fluctuate wildly in value. If you’re taking that much risk, you may as well own stocks.

By adding the value of your bonds and cash reserves, you can calculate the size of your portfolio “war chest”. If you divide the value of your war chest by your annual expenses, you’ll have an idea of how many years your war chest can support you while allowing the stock side of your portfolio to recover from any bear markets or recessions.

3. Review Your Portfolio Risk

Since we just covered the idea of your portfolio war chest, let’s examine that in the context of your overall portfolio allocation. There will always be ups and downs in the markets, but our reactions to these swings can vary greatly depending on the direction. Getting your allocation right will allow you to make good decisions during these times.

Meet with your financial planner to see how much your portfolio would decline if we were to experience another Great Financial Crisis. Over that time, the S&P 500 was down 57%. Would you be okay if your portfolio was down 57%? What does a decline like that mean in dollars? If you’re starting retirement with $1 million, that means your nest egg will have shrunk to $430,000 on paper. Will you be able to hold your water and let it recover?

Conversely, sticking with your strategy is also difficult during times of irrational exuberance. Speculation tends to be at its highest right before bubbles break. But seeing your friends get paper rich on meme stocks and day trading can make you feel like you’re missing out. People get more aggressive when they think they can’t lose. It reminds me of a Time Magazine cover I saw in the late 1990s: “Everyone’s Getting Rich But Me”. We all know how that ended.

Simply put, humans tend to have a greater appetite for risk when things are going well. They also tend to have a high aversion to risk when things are falling apart. In many ways, we are hard-wired to make the precisely wrong moves during these times. Being aware of this can allow you to make rational decisions during your retirement in uncertain times.

4. Check for Proper Diversification

I occasionally see concentrated stock positions in people’s investments. A concentrated position is an individual stock or bond that comprises 10% (or more) of someone’s overall portfolio.

Recently, we’ve seen some individual stocks have massive increases in value. It’s tempting to put down plenty of money on one of these shoot-the-moon opportunities. However, the opposite can just as easily happen.

It sounds impossible to think that a large, well-known company could completely go up in smoke, but it happened during the Great Financial Crisis. Remember General Motors? Or Wachovia? Who would have thought these companies’ stocks, which seemed like such a sure bet before 2008, would have done what they did?

In a truly diversified portfolio, if one company goes bankrupt, it doesn’t take you out. Being from the Charlotte area originally, I knew plenty of people who had bank stocks that represented a large portion of their wealth. It’s a completely avoidable risk.

5. Update Your Financial Plan

If you’re concerned about your retirement in uncertain times, getting your financial plan updated can take a lot of stress off your shoulders. You may find that you’re in good enough shape that you don’t need to stress over a potential recession or bear market. You may also uncover an easily addressable risk you didn’t know you had.

Either way, a full, written financial plan gives you the perspective to make good decisions.

If you need help creating a withdrawal strategy in retirement, then click here to set up a quick, complimentary introduction call to see if Prana Wealth is a good fit. We do still have the capacity to take on new clients.

As a fee-only financial advisor in Atlanta, we can (and do) work virtually with clients all across the U.S. and we’re here to help you when you’re ready.

The information contained herein is intended to be used for educational purposes only and is not exhaustive. Diversification and/or any strategy that may be discussed does not guarantee against investment losses but are intended to help manage risk and return. If applicable, historical discussions and/or opinions are not predictive of future events. The content is presented in good faith and has been drawn from sources believed to be reliable. The content is not intended to be legal, tax or financial advice. Please consult a legal, tax or financial professional for information specific to your individual situation.
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