4 Scenarios for Baby Boomer Retirees in Wake of the Coronavirus
The Coronavirus pandemic continues to impact important aspects of American life. Perhaps one of the most unsettling impacts for Baby Boomers is the steep drop in the stock market that began around the middle of March.
Houston investment management firms can help.
Most Baby Boomers, who were born between 1946 and 1964, are either already in or approaching retirement. As a result, any declines in their retirement nest eggs caused by a falling stock market may be affecting their retirement plans.
Many who are in or approaching retirement have stock market investments they plan to draw from for living expenses during their retirement years. Many, for example, are aware of and plan to follow the 4 percent rule, a common principle whereby retirees can commence withdrawing 4 percent annually from their investment portfolios and not likely run out of money. The 4 percent rule was originally based on a mix of stock and bond investments and assumed a 30-year retirement span. However, the 4 percent rule might suggest lower starting withdrawals for new retires whose retirement nest eggs are heavily invested in stocks following market declines, especially early on in the game. And with yields on bonds at historically low levels, future returns from that portion of a retirement portfolio may very well be lower.
Baby Boomers may also feel vulnerable about retirement in light of the Coronavirus crisis. It’s far from clear when the U.S. economy will fully return to normal.
While some Houston investment management firms focus on planning up until retirement, Linscomb & Williams helps both pre-retirees and retirees. How best to distribute retirement monies and sustain wealth are distinctly different goals from simply accumulating capital.
Two standard investing principles should be re-emphasized in the current environment. First, panic selling because of stock market declines should be avoided. If you sell when the market drops 20 percent, deciding when to get "back in" will be difficult. You could easily miss a rebound. In recent months, some are already feeling this regret.
Second, asset allocations in retirement portfolios should be periodically adjusted based on your risk tolerance. Investors should have a blend of assets, some of which have relatively high average returns and proportionally greater risk, while other assets may have lower average returns but proportionally lower risk.
Stocks, for example, possess the highest average annual return of any investment. The S&P 500 returned an average annual return of 10 percent between 1926 and 2014. But stocks fluctuate, and the fluctuations expose investors to risk. You can lose money in any given period.
Bonds and cash instruments, on the other hand, have a low rate of return (currently, cash instruments have interest rates that are, in many cases, less than 1 percent). But they are stable and counteract stock market fluctuations.
As you age, it’s wise to review your portfolio and your risk tolerance.
With these principles in mind, Baby Boomers nearing retirement should ask themselves questions about their plans in light of the Coronavirus. Below are some possible scenarios.
Retire Anyway, on the Theory that the Stock Markets will Recover
One possible avenue is to retire, as planned, figuring that the stock markets will recover. Historically, after all, U.S. stock markets have always regained their value after economic crises – and added value beyond that. This has been true of deep crises like the Great Depression of the 1930s and the Great Recession of 2008-2009.
It can, however, take time for the stock market to recover and thus, for your retirement portfolios to recover. Whether this is a workable and comfortable scenario for you depends on several factors, including how much money you have in the stock market, your portfolio’s asset allocation, the sectors and companies you are invested in and your plans to withdraw funds in retirement. Talk with your financial advisor about whether this is a wise plan for you.
Defer Retirement Until the Losses are Recovered
Another option is to delay retirement until your portfolio has made up a bit of the ground. This may provide more capital and more confidence in making the decision to retire. The possible drawbacks are that no one can accurately forecast exactly when markets will rebound. While losses should recoup eventually, the recovery may not occur in a straight line. A resurgence in the Coronavirus’ effects, for example, as occurred in the Spanish Flu epidemic of 1918, may cause further deaths and economic reversals.
Here, too, the decision depends on your individual circumstances, including the size of your portfolio, how well your individual stocks recover, your asset allocation and your plans. Again, discuss this option with a Houston-based investment management firm based on your specific goals.
Retire and Work Part-Time
If you elect to retire and work part-time, you’re in good (and increasingly growing) company. More and more retirees are choosing to take this route.
Working part-time can provide you with more financial flexibility than relying solely upon your original retirement portfolio in today's environment. Income from part-time employment can result in the need to withdraw less from your nest egg, so you can give your investments more time to recover.
If you are thinking of working part time, remember to talk with your financial advisor about when and how much you will receive in Social Security benefits. A good advisor can evaluate the effects of taxes on your earnings.
Create a Tighter Budget for Retirement
Baby Boomers can also come up with alternate spending scenarios in the event of down markets. "Tightening the belt" results in less strain on the portfolio and, in turn, your overall plan.
It’s a good idea to work with several different retirement budget forecasts. Many retirees, for instance, believe that their expenses will drop in retirement. But, in fact, expenses sometimes increase, such as plans for more frequent or more luxurious travel (which might be even higher post-Coronavirus).
Dropping travel plans may not only be necessary, but it may be a way of economizing in retirement; the same goes for downsizing your real estate plans or moving to a less expensive area. (For what you can expect when retiring in Houston, read our recent blog post: 10 Reasons Why Houston is a Good Place to Retire.)
Making retirement plans in the age of the Coronavirus can be especially complicated. Be sure to review your plan with your financial advisor. If you’re looking for Houston investment management firms to work with, contact Linscomb & Williams to see how we can help.