By Quentin Fottrell
'We have no debt and live comfortably on $150,000 a year'
Dear Quentin,
We are a healthy, retired couple (69 and 64 years old). We have always managed our own investments.
We currently have 60% stocks and 40% cash equivalents in our investment portfolio. Under the "100 minus your age" rule, we would be considered overweight stocks; Even in the most recent version of "120 Minus Your Age," we're pushing it. However, we keep doing the math and don't understand what we may be missing.
Our total net worth is 4.2 million dollars. We have $300,000 in non-retirement funds (60% cash), $1 million in a house, retirement accounts with $1.1 million in CDs, and $1.8 million in stock funds. We have no debt and live comfortably on $150,000 a year. My husband will begin collecting $55,000 per year from Social Security in 2025 and I will collect $28,000 in 2027.
In the worst case scenario, we fear a stock market crash. One, or at least a significant recession could occur. In that case, we have over 10 years of cash that we can draw on as the market recovers. Otherwise, we could continue to benefit from market growth and slowly reduce our share ownership percentage as we age.
Please let me know what I have omitted from our consideration.
Healthy Boomers
Related: 'It's the Saddest Thing': I'm Happily Retired and My 60-Year-Old Friends Want to Know How I Did It. Should I tell them my secret?
Dear healthy boomers,
Ten years is a long time to overcome a stock market crisis.
First, let's address your worst nightmares. After the market crash of 1929, when the stock market ultimately lost roughly 90% of its value, it took more than 25 years (November 23, 1954) for the Dow Jones Industrial Average (DJIA) to close above the level it closed at on that fateful day. But analysts say it actually took between five and ten years, taking into account deflation.
Among the many lessons of the Great Depression (and the 2008 financial crisis) is that one man's meat is another man's tofu, where one person sees stability, another expects chaos. Yale economist Irving Fisher famously said that stock market prices have reached "what appears to be a permanently high plateau," according to this October 16, 1929, report in the New York Times.
Meanwhile, in a bulletin dated March 25, 1929, the Federal Reserve warned that "excessive or too rapid growth in any field of credit, whether commerce, industry, agriculture, or securities trading, is grounds for concern for the economy." Federal Reserve System Too rapid expansion of bank credit in any field may result in serious financial disorganization..."
It took more than five years for the market to recover from the 2008 financial crisis, caused in part by predatory and subprime lending in the mortgage market and a lack of financial regulation. Diversification is also key to weathering those storms: Many companies survived the financial crises of 1929 and 2008, and, yes, some did not.
The Complexities of a Retirement Cash Cushion
He has no debt and his Social Security will give him an income of $83,000 a year, more than half of his pre-retirement expenses, not counting his $2.9 million in retirement accounts and CDs. Plus, you don't have a mortgage. You have worked hard and planned wisely before having a comfortable and peaceful retirement. You can afford both.
Some people who write in this column compare and despair. You don't have that problem, so you can worry less about what you may or may not have missed. The median retirement income for adults age 65 and older last year was $83,085 when adjusted for inflation, according to Retireguide.com. And the average income? That's $52,575 a year.
For others reading this, you must also be 62 to claim Social Security spousal benefits or have a child who is under 16 or already receiving Social Security. The amount also depends on whether the higher-earning spouse started claiming at age 62 or waited until full retirement age. (It seems her husband is waiting until he turns 70.)
Now that I've congratulated you, which seems appropriate given the circumstances, let's talk about the $67,000 shortfall, which is 2% of your portfolio, according to Paul Karger, co-founder and managing partner of TwinFocus, a wealth advisory firm. "This should be easily achievable given current rates and a balanced portfolio approach to stocks and bonds," he says.
For the most part, he has protected himself against a major stock market decline, given his current allocation of stocks and cash, and his age and risk profile. "We advise using taxable funds to cover any shortfalls before dipping into your retirement accounts, given the tax-advantaged nature of your retirement assets," Karger says.
Only stock market columnists, economists, analysts and psychics should make predictions and I do not give probabilities based on any of the aforementioned parties.
He has one caveat: "We would suggest starting to nibble on some longer duration bonds, maybe Treasuries," he adds. "While short-term bonds and money market funds offer compelling returns and, in many cases, higher returns than longer-duration bonds due to the inversion of the yield curve, this may prove to be a short-term phenomenon. "Adds Karger. .
Since most of your wealth is in retirement accounts, distributions will be subject to taxes as they are withdrawn. "This decreases available after-tax funds and requires a well-thought-out distribution strategy to minimize the amount of taxes paid each year," says Michele Martin, president of wealth management firm Prosperity in Minneapolis, Minnesota.
Increasing the amount of fixed income investments (your allocation to stocks and bonds) will create a "smoother ride" over time, he says. Martin suggests creating a more diversified allocation to bonds and fixed income investments. "If interest rates go down, the return on cash will go down at the same time and that's defined as reinvestment risk," he adds.
"The mode of distribution is the opposite of dollar-cost averaging," Martin says. "When you take distributions from your portfolio in down markets, the impact is magnified. A more conservative portfolio that creates recurring income actually provides similar overall performance to a more aggressive portfolio because it moderates the drawdown in volatile market conditions."
In other words, you've mastered the "accumulation" part of your retirement plan and now it's time to focus on the "distribution" strategy. Bottom line: Martin says a high-end 60/40 asset allocation is adequately diversified given your age, and it may not be necessary to reduce the amount of exposure to stocks if you're comfortable with the variability of stock returns. investments.
How will the current stock market "bubble" end?
About that possible stock market crash. Only stock market columnists, economists, analysts and psychics should make predictions and I do not give probabilities based on any of the aforementioned parties. These predictions compiled by State Street Associates, based on research by Harvard University Professor Robin Greenwood, rate that outcome as low.
MarketWatch columnist Mark Hubert predicts that the current stock bubble will end with a slow deflation rather than a burst. He does not foresee the so-called crash, defined by some economists as a 40% drop in prices in the next two years. He recently wrote about the "huge return differential" between the cap-weighted S&P 500 SPX and the equal-weighted version.
"So far this year, the cap-weighted index (the one cited every day in the financial press) has outperformed the equal-weighted version by more than 10 percentage points," he adds. "Last year, the cap-weighted version outperformed by more than 12 percentage points." (The equal-weighted version gives each company equal weight, regardless of size.)
"This difference suggests that the performance of the capitalization-weighted version has become increasingly dependent on the largest stocks in the index, and many analysts believe that such concentration is a sign of an unhealthy market that is especially vulnerable to a decline. "Adds Hubert. "But my analysis of data since 1970 does not support this." It errs more on the side of a moan than a crash.
So enjoy these happy years... and send us all a postcard!
More columns by Quentin Fottrell:
'They are fishing for my mother': she fell madly in love with a man through Facebook. How can I convince her that she is a scam?
'We live on a fixed income': My husband and I are retired. We are invited to our niece's destination wedding. Are we obligated to buy a gift?
"I don't live extravagantly": I have $68,000 in credit card debt and $50,000 in 401(k) debt. How can I get out of this trap with a salary of $55,000?
Check out The Moneyist's private Facebook group, where members help answer life's thorniest money problems. Post your questions or participate in Moneyist's latest columns.
By emailing your questions to The Moneyist or posting your dilemmas to The Moneyist Facebook group, you agree to have them posted anonymously on MarketWatch.
By submitting your story to Dow Jones & Co., the publisher of MarketWatch, you understand and agree that we may use your story, or versions of it, across all media and platforms, including through third parties.
-Quentin Fottrell
This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently of Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones News
06-26-24 1728ET
Copyright (c) 2024 Dow Jones & Company, Inc.
