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What Should Retirees Do About the Coronavirus?
- By Travis Echols
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- 25 Feb, 2020
The biggest concerns people have about this most recent coronavirus is the impact it may have on our own health and the health of our loved ones, friends, and fellow humans across the globe.
Because fear sells, the media will never let a potential disaster like this go to waste. They live for the views and the clicks. While fear mongering is inevitable, overconfidence is her ugly twin sister. A virus like this must be taken seriously.
Sign up to receive my free monthly email articles on retirement planning--no cost, no obligation. As of this writing, the virus has now infected more than 80,000 people worldwide, with the number of deaths from the virus over 2,700. To keep this in perspective, between 290,000 and 650,000 people die from the flu every year. This short video from the World Health Organization offers some facts about past coronaviruses with an emphasis on the current outbreak. |
Here is CDC’s webpage: https://www.cdc.gov/coronavirus/2019-ncov/index.html
For retirees, another big concern is the economic impact the virus will have on their retirement portfolios. In our global economy, a problem in China can be a problem for American companies who use their products and services in a complex supply chain. A recent article reports that 94% of the Fortune 1000 are seeing coronavirus supply chain disruptions.
China now makes up 15.5% of the global economy. The country is a major purchaser of commodities like oil and agricultural products, and because companies like smartphone and car manufacturers depend heavily on Chinese manufacturing, the electronics and auto industries face the largest first-quarter effects on earnings.
So, even though the cases of the virus in the American population are small, the impact of the virus in China can have a ripple effect on American companies.
Recent retirees and soon-to-be-retirees are especially vulnerable to stock market disruptions because they do not have the earning years to make up losses. I’ve written about this risk (called sequence-of-return risk) many times in my articles and PDF books. I also address it in my webinar which I am currently running called, “10 Unexpected Risks to Your Retirement.”
I also help retirees understand how to avoid excessive stock market risk without necessarily sacrificing gain in my article “How to Reduce Investment Risk in Retirement.“ In that article I point out the other factors of higher expected return that you can tilt your stock portfolio toward while reducing your overall stock market exposure.
Larry Swedroe’s book, Reducing the Risk of Black Swans, has a chapter called “Enough”. He wisely advises that retirees need to ask themselves how much additional incremental potential growth is worth relative to the additional risk they are taking. The book is worth buying just for this brilliant article in the appendix. This discussion is particularly pertinent after a long bull market with lofty valuations (The S&P 500 CAPE Shiller PE 10 at 30.3 as of today against the historical average of 16.7).
The key to handling market disruptions as we are currently experiencing is to have already been prepared for such an event. When you have a well-thought-out retirement plan and your investments are properly aligned with that plan, you follow the plan.
The emotions are normal and understandable, but you can’t let them derail you from your goals. Your carefully researched plan, which anticipated such an event (though not specifically since the future is always unknown), must be followed if you are to come out a winner on the other side.
It’s unfortunate that even smart investors are vulnerable to biases and emotional decision-making. The decisions you make based on your emotions rather than evidence have much more power to harm your financial wellbeing than any global health crisis, including today’s coronavirus outbreak. For a review of some common self-sabotaging behaviors, see my article “Behave Yourself!”.
For investors, you can take advantage of the market downturn by rebalancing your portfolio and increasing your allocation in stocks, which is essential to buying in the dips. You can use your dividends and interest to also purchase shares at lower prices.
If you are dynamically rebalancing your portfolio, you may even choose to take your stock percentage even higher than before IF valuation metrics like the Shiller PE 10 warrant. For more on this, see “How to Navigate the Retirement Danger Zone”.
If you are withdrawing income from your retirement portfolio, market downturns may signal the need to slightly reduce your distributions temporarily until the market recovers. I outline this withdrawal strategy in “Three Steps to Safely Maximize Your Portfolio Income.”
In long bull markets like the current one (the longest in history), it is easy for all investors and advisors to think they’re geniuses and become overconfident. “Recency bias” can also cause us to erroneously extrapolate the most recent results into the future, forgetting the bear markets like 2000-2002 and 2008-2009.
But when markets correct eventually and overperforming asset classes revert to their averages, and the bandwagon performance-chasers start scrambling and hiding for shelter, those who have been prudent will still be standing and perhaps be even better off after the turmoil. The novice speculators will have crashed and burned.
Using history as our guide, the best stance is to be cautiously optimistic. We have faced many calamities, including two world wars in the previous century, and so far, no event has halted the growth and profitability of global companies over the long term.
Will the recent coronavirus interrupt global supply chains and impact the short-term profitability of some companies? Probably. Will the global markets recover? The answer is most likely yes, if history is our guide.
We’ve only got one shot at retirement. We can’t afford to be complacent. We need a strategy that is well-researched and that has been shown to work under all sorts of market conditions and disruptions—and can take advantage of these inevitable circumstances. Then, we need to be disciplined to implement the strategy when our emotions may be pulling us in the opposite direction.
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Investment Advisory Services offered through JT Stratford, LLC. JT Stratford, LLC and Echols Financial Services, LLC are separate entities.
- Liquidity--Retirement assets are not being locked up or annuitized such that capital is not available for emergencies.
- Income—Using an optimized withdrawal rate, an increasing income is produced to combat inflation (unlike many pensions, bank and insurance strategies that are not inflation-adjusted).
- Growth--assets that can combat inflation over a 20 to 30-year period, giving the retiree more income and upside potential under normal and good economic times.
- Safety--manages the myriad of investment risks like market risk, inflation risk, and credit risk. Under worst-case scenarios, if withdrawal amounts are adjusted by using guardrails, the portfolio can still provide a lifetime income.
Here is an executive summary of how to build up a portfolio for retirement in seven steps.
1. Values clarification and goal-setting . Figure out the income objective and capability of your retirement assets in lifestyle terms, then financial terms. In other words, set realistic, specific, financial goals based on your core life values.
2. Asset allocation glide path . Figure out how to diversify your retirement assets among stocks, bonds, and cash, based on your age, risk tolerance, retirement goals, and changing market values.
3. Valuation-dependent efficient frontier . Figure out which areas of the markets are historically inexpensive, and which are historically expensive. Don’t take on more volatility than you need to for the growth you need or desire.
4. Multi-asset class approach . Diversify one more step for more growth and less volatility. Put more money in the specific market areas that are less expensive and less money in the specific market areas that are more expensive.
5. Tax-aware asset location and distribution . Save as much on taxes as possible by figuring out which type of investments should be held in which types of accounts. If you are drawing an income from your assets, figure out the least-costly order for making withdrawals.
6. Investment selection based on account type (qualified, nonqualified) and asset-class propensity and magnitude of outperformance (passive, factor, managed, etc. ). Figure out what kind of investment to use (index mutual fund, factor mutual fund, actively managed mutual fund, single factor ETF, multifactor ETF, passive ETF, individual stocks, individual bonds, Unit Investment Trust, closed-end fund, etc.) based on the account type, asset class, and growth and income needs.
7. Rules-guided rebalancing based on retirement glide path and multi-asset-class approach . Readjust the investment mix based on your changing personal situation and changing market values.
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Here is a summary of the details backing this approach. Also, click here for more background information regarding my investment philosophy.
1. Values clarification and goal-setting
Investment planning for (or in) retirement starts with retirement planning. You start with thinking about your life goals...your dreams...your ideal life in retirement. It could involve doing no work, working part-time, or doing seasonal work. Your ideal life could be going back to school, spending more time with family, traveling, ministry, etc.
Ask yourself questions like, "What would I want to do if I
didn't need to work for money?" or "What are the most important
dangers, opportunities, and strengths I need to address?" or“Ten years from now, if I am looking back on a successful
ten years, what will I have achieved?”
This conversation allows you to create specific
goals around your most cherished values. And your goals will be unique to you.
You then design an investment plan to help you live your ideal life.
This kind of goal-focused, plan-driven approach minimizes the
chances of making bad investment choices based on current events and emotions.
Instead, you can choose and maintain the
specific mix of investments that can best deliver the results you need--using a
disciplined, research-driven approach.
2. Asset allocation glide path
The next major question is what kind of investments do you need to meet your goals. All investments have risk. Even "safe" investments over long periods have inflation risk. No single investment delivers growth, high income, and safety of principal. The key is designing a portfolio that balances them in a way that supports your retirement objectives.
And this mix may change over time. For example, for most people, it makes sense to gradually decrease their exposure to high-growth, high-volatility assets like stocks (i.e., equities) as they approach retirement. In retirement, it is usually best to maintain a flat equity glide path, dynamically adjusted for valuation. This approach protects you from the retirement-danger-zone risks of portfolio size effect and sequence risk, while allowing you to take advantage of bear markets and market corrections. See How to Navigate the Retirement Danger Zone .
Protecting your lifetime retirement savings from excessive taxes is a crucial part of holistic financial planning. This involves protecting your IRA, 401k, lump sum pension rollover, Social Security, and any other type of retirement account or income stream from crushing tax rates.
So let's be sure to differentiate tax preparation
from tax planning
.
Tax preparation , also called tax return preparation, looks backward, one year at a time, to get the numbers right to accurately calculate your tax liability (and how much you owe or overpaid).
Tax planning on the other hand looks at taxes in the context of your overall financial picture. A tax planner not only looks in the rear-view mirror but will look forward 20 to 30 years at your projected tax liability and ask what can be done to lower your lifetime tax bill.
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If you have savings outside of pretax retirement accounts invested in capital assets (like stocks, bonds, ETFs, mutual funds, precious metals, jewelry, and real estate) which have large unrealized capital gains, this article is for you. You may be missing the opportunity to pay zero taxes NOW instead of 15% or higher rates in the future. Sign up to receive my free monthly email articles on retirement planning--no cost, no obligation
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Originally written on Aug 2, 2018 and updated for tax law changes.
If you are no longer working and have reached the age of 72,
you probably know about Uncle Sam’s rule for you to take a Required Minimum Distribution
(RMD) from your traditional and rollover IRA(s) each year for the rest of your life. You can always withdraw more,
but this requirement is the minimum
you must take or be severely penalized. Fortunately,
this rule does not apply to Roth IRAs. (The SECURE Act of 2019 changed the starting RMD age from 70½ to 72 starting in 2020, but fortunately you can still make a Qualified Charitable Distribution (QCD) starting the year you turn 70½.)
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If you have delayed paying taxes in your pretax IRA, 401(k), or 403(b), etc, there comes a time when the IRS wants their taxes. And if you don’t give them their taxes based on their required withdrawal schedule, you'll get hit with a 50% penalty on top of what you owed.
Along with Social Security and other retirement income, this RMD can significantly raise your tax rate. Also read How to Dodge the Social Security Tax Torpedo . There are not many ways to reduce this tax burden. In the past, retirees have used various deductions including charitable cash contributions and gifting of highly appreciated assets to charities. (The latter not only gives you, the donor, a deduction but also avoids a long-term capital gains tax bill.)
However, with the passing of the Tax Cuts and Jobs Act of 2017 (TCJA) , with its almost doubling of the standard deduction, itemizing deductions won’t make sense for near as many retirees. Ah, but there is still a strategy. But first let’s better understand the RMD.
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The latest book I am reading is “ The Psychology of Money ” by Morgan Housel. Chapter 3 is entitled “Never Enough”. In this chapter, Housel talks about when rich people do crazy things. He tells stories of wealthy people who never had a sense of enough and wrecked their reputations, families, freedom, and happiness because of it. I have also talked to older couples who tell me they once had a much better retirement in view, but the quest for more led them to make unwise investment decisions that left them financially crippled in retirement. The importance of knowing when you have enough is not only vital to when you retire but also how you retire. It can affect how you invest, how you withdraw, and your overall satisfaction before and during retirement. Be sure to read to the end where I summarize a few key takeaways. Housel makes the four following observations in chapter 3 of his book. Sign up to receive my free monthly email articles on retirement planning--no cost, no obligation
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Whether you do mini-Roth conversions over several years or big Roth conversions in a few strategic years, the Roth conversion strategy could save you tens if not hundreds of thousands of dollars over your retirement. This article will get deep into the issues of Roth conversions for retirees and the ten steps to take to be sure it is done properly. Be sure to scan or read to the end where I will give you the simple answer to getting your Roth conversion questions answered. Sign up to receive my free monthly email articles on retirement planning--no cost, no obligation
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Making big financial decisions immediately following the death of a close family member can be dangerous. It is often best to allow some time before tackling big financial decisions. On the other hand, some people find getting immersed in the finances is helpful in coping with the loss. Whatever way is best for you, you will need to give it your
careful attention to avoid big financial mistakes. The different types of accounts have different rules. I'll address the most common types. In the case of the death of a parent or anyone other than your spouse in which you are a non-spouse beneficiary, there are many rules that you must know to make the best decision for you and your family. (In this article, I use the common parent-child inheritance, but the planning strategies can apply to other non-spouse situations.) Your decisions can have major tax and investment consequences, both now and in the future. And some of these decisions have time deadlines keyed to your parent’s date of death. Also, some of these decisions are irreversible. You can download my free Estate Planning Survivor Checklist here
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So, you don’t want to rush in and make decisions without knowing the rules, and you don’t want to wait too long and be stuck with fewer options. (In this article, I am not addressing estate taxes. As of 2021, only estates valued at $11.70 million or more are subject to federal estate tax. But there are plenty of other tax pitfalls to navigate around. I am also going to focus on liquid savings like investment and retirement accounts, versus real estate which will be for another time.) Sign up to receive my free monthly email articles on retirement planning--no cost, no obligation
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Delaying Social Security makes a lot of sense for many retirees; but there are common pitfalls that can cost you a bundle. As you know, the longer you delay your Social Security Retirement benefit, the higher your lifetime monthly payments are figured to be. This increase in delaying continues until age 70, after which there are no further increases for delaying. This increase for each month that you delay filing is not small, especially considering the current low interest rates. Even after full Social Security age, your payment goes up by 8% per year until age 70. Sign up to receive my free monthly email articles on retirement planning--no cost, no obligation . Here are the five big mistakes of delaying your Social Security retirement benefit. |
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Are you wondering about the impact of the
2020 election results on your retirement? If so, you are not alone. The two political parties are greatly polarized. While the Democrat party has moved further toward ethno-centric socialism, the Republican party has moved further toward nationalistic populism. The difference in the two parties’ goals for our country is wider than ever. Sign up to receive my free monthly email articles on retirement planning--no cost, no obligation . |
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Investment Advisory Services offered through JT Stratford, LLC. JT Stratford, LLC and Echols Financial Services, LLC are separate entities.
Serving Cumming, GA, Forsyth County, and the surrounding areas of John's Creek, Alpharetta, Milton, Duluth, Buford, Suwanee, Flowery Branch, and Gainesville
