Four Ways to Fill the Hole in Your Retirement Plan

You have been working, saving, and investing for retirement with zeal. You worked 40 or even 60 hours a week for over 50 years. Finally, you may relax and enjoy activities like bridge, golf, fishing. You no longer have to drudge to work or answer to your boss.

Then the pandemic strikes: the economy begins to deteriorate, the stock market plummets, wiping off up to a third of the value of your stock holdings, and bond yields vanish. So, what now?

The good news is that you have options. Begin with these five things, and your chances of a secure retirement will improve.

1. Develop situational awareness

This term originated from the early days of military aviation and is described as “the perception of environmental components and occurrences concerning time and space, the comprehension of their significance, and projection of their future state.” It was thought to be critical for pilots if they were to survive encounters with opposing aircraft.
For investors, this entails objectively analyzing the risks that surround them. Recognize the spectrum of possible outcomes for your investments. Find out what has happened in the past. Make a list of the most critical inputs. Remove the rubbish from your information diet and concentrate on useful, insightful, and accurate sources. Stay away from recession panic. Perhaps most importantly, realize what you can and cannot control.

2. Implement a “decumulation” strategy

How much of your assets will you withdraw every year? That is a tricky question that depends on several unknowns, such as inflation, interest rates, bond yields, financial situation, and even lifespan. William Sharpe, who won the 1990 Nobel Prize in Economics for his work on a model that’s essential in investment decision-making, termed the use of retirement savings “the nastiest, toughest problem in finance.”

The key to successfully handling this is to create a financial plan that accounts for the unknowns and then focus on your goals.

Every plan should assist you in determining how much you can spend comfortably every year. Without such a strategy, you risk either not spending what you want and can afford, or worse, outliving your funds. Working from a position of precise information rather than guessing is the most stress-free approach to retirement.

3. Understand the risks associated with fixed income

Some investors appear to be enticed by the disparity between the best and lowest grade bonds. Remember the 2008-09 financial crisis lesson: Chasing yield is a costly and foolish endeavor. And just because the Fed is suddenly buying low-quality bonds doesn’t mean you should too. Here’s how to approach debt. Bonds act as a counterweight to your stocks. They also generate income. Most significantly, they guarantee a return of (and not on) capital.

Since fixed-income securities should be included in any diversified portfolio, it’s preferable to stay with investment-grade bonds. You cannot go wrong with high-quality corporate debt. Treasury Inflation-Protected Securities (TIPS) are another option for a moderate inflation hedge. Search for opportunities in the municipal bond market, particularly in general obligation bonds, but only from entities that are not too indebted. We won’t see many state defaults, but areas like New Jersey and Illinois can have some scary moments. Those are best avoided if you’re nearing retirement.

High-yielding (or junk) debt might be tempting. But be cautious. Consider what happened to the most significant high-yield exchange-traded funds in recent weeks: Last month, the iShares iBoxx High Yield Corporate Bond ETF and the SPDR Bloomberg Barclays High Yield Bond ETF dropped 22% and 23%, respectively; both are currently down more than 10%. Anyone looking to cash out or readjust their assets was let down. Is the slight increase in return worth the extra risk?

4. Reduce risk, expense, and equities concentration

As equities are riskier than bonds, they have higher expected returns. That means not just the possibility of not achieving the desired returns but also stomach-churning volatility along the road. However, given the general rise in lifespan, you cannot afford to be without them.

The solution is simple: swap out all of your individual stock holdings, pricey actively managed funds, and alternative assets for widely diversified, low-cost index funds.

The danger of owning a single stock is simply too great for those in or nearing retirement. As fantastic as Apple, Google, and Amazon have been, they have seen drops of up to 80% at various periods. You don’t want to have to dip into these when they have declined that much like you don’t want to tap into junk bonds.

5. Make the switch from saving to spending

This is more difficult than it appears, especially during times of market turbulence. The key to this is to manage your money as well as your mindset.

Recent retirees have been stuck when it comes to spending their savings. Surprisingly, for many retirees, underspending might be a bigger problem than outliving their means.

Software applications can be helpful. Every financial adviser uses these to evaluate how much money may be spent comfortably every year. Retirement calculators that do something similar can also be found online. Make use of them.

You gave up decades of your life on the work in exchange for the opportunity to enjoy your retirement. If you do it well, the tradeoff will be well worth it.

You could have sold during the crisis, but (a) you would have taken a significant price hit, and (b) there would have been a significant reduction to the net asset value. These would have been poor-selling opportunities. Investment-grade bonds are rarely this bad; they’re called junk bonds for a reason.