“I’m scared about my investments due to recent stock market declines, high inflation, and the jump in interest rates. Where do you think the markets are headed right now?” This question was posed to me at a recent lunch I had with a retiree in her late 70s.
“To be perfectly honest, I don’t know,” was my opening answer. Then I added, “Not many people, including the experts, have reliably predicted the timing of stock market crashes, inflation, and spikes in interest rates over long periods of time lasting 10 years or more. Sure, there’ll always be a few people who got lucky predicting the last crash or two, but their long-term track record usually isn’t that good.”
I cautioned her against panicking by reading headlines with scary predictions of future economic calamities. It’s easy to be confused by the many articles she might see in popular and financial media sources. For example, on the same day I had lunch with that friend, I read one article that predicted a bear market, while another article predicted favorable times ahead for the stock market. In both cases, their predictions were supported by impressive analysis and charts.
How do ordinary people know who to believe?
Plan for uncertainty
“What do you think I should do?” was my friend’s next question. “Probably you should do nothing,” was my initial answer, but then I elaborated on my reasons.
I suggested that she develop plans and strategies to survive stock market crashes, high inflation, and volatile interest rates without needing to know when they’ll happen. Once you have such a plan in place, then when one of these challenges happens, you have the confidence to do nothing.
To implement such a strategy, you’ll want to build a diversified portfolio of lifetime retirement income that can protect against various economic challenges. Such a portfolio would have a mix of protected and variable lifetime retirement paychecks. Then manage your regular and periodic spending so that the total of your combination of retirement paychecks has a healthy margin over your regular and nonregular living expenses. This helps you deal with surprises that are inevitable over the course of a long retirement.
Protect against stock market crashes with protected income
You’ll want to be sure that a portion of your lifetime retirement income is protected against stock market volatility. For people who haven’t yet retired, you can do this by holding off on starting your Social Security income for as long as possible (but not past age 70) in order to maximize these benefits. Your benefits help protect you against all three risks mentioned previously—inflation, stock market crashes, and interest rate volatility.
My friend had already started her Social Security benefits, so I added that if she would feel more secure with additional protected lifetime income, she could buy a low-cost income annuity. Such annuities are less expensive now that interest rates are higher, compared to the recent past.
“But aren’t annuities bad?” my friend asked. I responded by saying, ”The answer depends on who you ask. There are low-cost annuities that can work well, but there are also high-cost annuities that you might want to avoid.” Then I added, “You’ll need to do some careful shopping or find an expert you trust to help you.”
I observed that if you ask an expert who makes their money by investing people’s assets, they might not like annuities. If you ask an insurance expert, however, you’ll find that they typically love annuities. Ideally, you should find an advisor who doesn’t have a bias for or against annuities to help you determine how much annuity income you might need.
Some people are philosophically opposed to buying annuities from insurance companies in any scenario. In that case, they can build a bond ladder that provides cashflow for a specified period. Since my friend is in her late 70s, she could build a bond or CD ladder that would most likely deliver regular cashflow for the rest of her life. Laddering her investments also helps protect against volatile interest rates. The downside is that most likely she’ll receive reduced cashflow from such a ladder compared to a low-cost income annuity; that difference is one price to pay for having a philosophical opposition to annuities.
A more recent strategy could also be a tenure payment from a reverse mortgage, which can deliver a fixed monthly income. Another possibility is to use a line-of-credit reverse mortgage to draw upon when the stock market is down, leaving invested assets time to bounce back.
Protect against inflation with variable retirement paychecks
You’ll also want to have a portion of your retirement paychecks invested to provide a potential for growth to counter the effects of inflation. The most common example would be to invest significantly in the stock market and have a careful drawdown plan that’s intended to last for life, no matter how long you live. While there are many methods to accomplish this goal, one such strategy supported by research is to invest in a low-cost balanced, target date, or stock index fund, and use the IRS requirement minimum distribution (RMD) to determine the amount to withdraw each year.
The above strategy adjusts your withdrawal amount each year and reflects investment gains or losses that you’ve experienced. As a result, you’ll need to be prepared to reduce some of your spending if your withdrawal amount goes down due to recent investment losses.
The strategies discussed here can go a long way to help nervous retirees in today’s trying times. While there’s a lot to absorb with these ideas, it’s a good use of your time to understand and implement these strategies. You’re setting yourself up to be comfortable doing nothing in the future in the event of stock market volatility, which should help you sleep at night when investment markets are causing a lot of anxiety.