As volatility and uncertainty in the financial markets remain at levels unseen in years, one of the most common questions for those readers who are currently retired or plan to retire soon, is this: “Should we stay invested and allow our investments to just ride out this wave?”
It’s a question that almost all investors, no matter what age, have been asking for months. However, for those approaching their golden years, getting this decision right is critical to maintaining a prosperous retirement and avoiding the need to put life on hold.
There is absolutely no one right answer to this question given that the needs, wants and desires of every retiree are so vastly different. Relying on generic advice to determine the most appropriate strategies can be dangerous and result in less-than-desired outcomes.
Though there are many parts to this equation, here are a few foundational things to consider when answering this question for yourself:
1. Know your ‘Income Security Score’
Your Income Security Score is quite simply the percentage of your monthly expenses that are covered by predictable and guaranteed sources of income, such as Social Security, pensions and annuities. For example, if your monthly expenses are $5,000 and these guaranteed income sources combined account for $3,000/month, then your income security score would be 60%.
In this case, there is a “gap” to be filled of $2,000 that needs to come from other sources just to maintain lifestyle. If that means taking regular distributions from accounts that are volatile and fluctuate, that can be a dangerous approach, resulting in possibly having to sell assets when values are low. However, if your score is near or at 100%, you should now have more flexibility to ride out the ebbs and flows of the market and be better positioned to dictate when to make those distributions.
2. Understand Your Various ‘Investment Time Frames’
As retirement approaches, there is a good chance you heard someone tell you that your investment time horizon is short, and the prudent thing to do is shift a significant portion of your assets away from stocks and into historically more conservative investments like bonds, CDs or cash. But understand that not all parts of your retirement will fall under the umbrella of a “short” time horizon.
The actual need for cash in the near future would ABSOLUTELY apply and be considered a near-term need. However, living a quarter century or more in retirement, paying for the cost of health care or continuing to grow a legacy you wish to leave are all still pieces to this equation that require us to consider long-term growth strategies for that portion of our wealth, which we may …….