What Should Wise Retirement Stewards Do Now?
It’s honestly hard to know what to write about in times like this.
If you are a Christian believer, I trust you are seeking encouragement and guidance from God and His Word, and strength and consolation through his Holy Spirit.
God is our refuge and strength, a very present help in trouble (Psalm 46:1).
Like many of you, I attended “virtual church” for the first time in my life last Sunday. It felt very different; I think that’s because God created us to be in close community with one another (Acts 2:42).
I hope this is temporary—only God knows for how long.
In these challenging times, with so much human suffering and death, the stewardship of our health and that of others trumps stewardship of finances big time. So, first and foremost, take care of yourself and your family, and do what you can for those in your neighborhood, church, and community, even if that means being more generous with your finances.
Do not merely look out for your own personal interests, but also for the interests of others (Philippians 2:4).
But we can’t take our eye off the financial ball either (especially since the media is inundating us with so much bad economic news).
This pandemic will, God-willing, eventually, pass. But it will probably leave behind some enormous problems, and some significant economic fallout as well. It is already wreaking havoc on many families’ budgets, 401(k)s, and IRAs. Consequently, many of us are wondering, “what would God have me to do now?”
Our government and health officials are giving us lots of advice on how to plan for (and hopefully) prevent the spread of the virus. So in this article, I will offer some possible answers to the financial stewardship part. But only you can decide what is best for you and your family—and that is between you and God.
First Things First
The most important thing Christians can do is pray. Pray for the containment of the virus, those working in the government, health care providers, and for the sick that they would recover. Pray for small business owners and that stability would return to the financial markets.
Do not be anxious about anything, but in everything by prayer and supplication with thanksgiving let your requests be made known to God. And the peace of God, which surpasses all understanding, will guard your hearts and your minds in Christ Jesus (Phil 4:6-7).
From there, vigilance is essential to understand what is happening with the pandemic and also in the financial markets.
Young people may be less concerned about the virus, and also short-term market losses. But the infection is more severe for older people, and so are significant losses in their retirement portfolios. We can’t compare financial loss with the loss of health or life, but it is something to be concerned about just the same.
Scripture instructs us on what our heart attitude should be toward loss in this life:
Indeed, I count everything as loss because of the surpassing worth of knowing Christ Jesus my Lord. For his sake I have suffered the loss of all things and count them as rubbish, in order that I may gain Christ (Phil 3:8).
But that doesn’t mean that we should ignore the challenges or do nothing (although, sometimes, patiently doing nothing is the best posture, especially when we don’t know what else to do.)
Should I do Something?
An often-heard piece of advice when the markets are so volatile is, “don’t just do something, stand there.” That is difficult to do in times like this, mainly because our emotions are running high.
Those who are nearing retirement may be concerned that they may not be able to when they planned. If you are already in retirement, you may feel downright scared. In a way, your fear is understandable—we are in a perilous and unprecedented situation—and the financial threats are real. (I discussed the importance of trusting God in my last article.)
Retirees, and soon-to-be retirees, need to be able to generate income to pay the bills. I am living (partially) off my investments. The hard reality for those of us in this situation is that we are taking money out of retirement savings at the same time the value of our savings is declining. This results in a loss-compounding effect, which can be especially concerning.
Times like these can cause soon-to-be retirees or those already there asking whether we should stay in stocks at all. Is this the time to bail out and never look back? I can’t answer that definitively for you, but probably not; emotionally-driven financial decisions almost always end badly.
I can’t help but notice that whenever the stock market has a bad (in this case, REALLY, terrible) few weeks, more ads than usual show up on TV and the internet offering you the perfect “safe” investment to protect yourself from the ravages of the volatile financial markets. These are often pitches for indexed- and variable annuities and precious metals, such as gold and silver.
This is understandable—as I have observed in the past, there is a lot of fear-mongering in the financial products marketplace. These companies know how unsettling extreme market volatility can be and how good their “almost too good to be true” product offerings can sound when potential customers are confused and stressed.
Annuities and precious metals can be appropriate for many retirees’ income strategies. But the keyword here is “strategies.” Deciding based on emotion (fear, greed, etc.) in the heat of the moment is not a strategy. It’s an emotional reaction leading to behavior that may detour you from your long-term plan, which may cause you harm in the future.
The Christian’s foundation for any investment decision must be biblical wisdom combined with a reasonable understanding of what they are dealing with (or getting counsel and advice from someone who does, such as a trusted financial adviser). Always seek to understand what you are investing in and why you are doing it before you decide.
Through wisdom a house is built, and by understanding it is established; by knowledge the rooms are filled with all precious and pleasant riches (Proverbs 24:3-4).
Where there is no guidance, a people falls, but in an abundance of counselors there is safety (Proverbs 11:14).
Now is a Bad Time to Change Strategies
As I wrote in my last article, the middle of a financial crisis is an awful time to realize that you have taken on much more investment risk than you are comfortable with. You may need to reassess—and perhaps change your strategy—but it would be best to do that in more settled times.
Once the markets have settled down and start to rebound, you may even feel better about your strategy. At the very least, you can think it through without the fog of crisis clouding your thinking.
In the last article, I also mentioned using this as a time to learn. I suspect that recent market losses (including some traditionally “safe” investments like corporate bonds) have taught us some harsh lessons about hidden risks in our investment portfolios.
I have always viewed large-cap, dividend-oriented stocks as being “safer” than others that are more growth-oriented.
And I believed that high-quality corporate bond funds were even safer than dividend stock funds. But in the current market mayhem, everything is getting clobbered.
Another looming problem for retirees, which may not play out until later this year, is the possible reduction of company dividends. Stock dividends have been up as economic growth has continued, but the party may be over, at least for a while.
Many retirees have increasingly relied on dividend income as treasury and bond yields have fallen. And they just took another plunge
Companies with an extensive history of paying dividends are reluctant to cut them. That will be the case with this market crisis as well; many will go to great lengths (such as tapping cash reserves) to avoid doing so. Those of us who depend on them will have to wait and see.
I have no plans to sell my dividend stock funds. They comprise less than 30% of my portfolio (since prices are down). Because they are mostly good quality companies, I expect them to rebound when the overall market does (whenever that is).
I invested in these funds because they are successful, stable enterprises that consistently generate income for investors. I have no reason to think that won’t still be the case a year or two from now. Would I have lost a little less (on paper) if I invested instead in a total stock market index fund, such as Vanguard’s VTSAX? Yes, but I also would have received less dividend income.
Questioning Your Strategy?
Based on what you are seeing in your portfolio over the last few weeks, you may question your long term strategy. As I wrote in my previous post, this can be an excellent time to reassess your risk tolerance and reevaluate your investing strategy.
If you are considering getting out of the market altogether, just be aware of the implication of such a decision.
First, you are trading no stock market risk for potential long-term stock market returns. Many retirees will need some exposure to the markets if only to keep up with inflation.
Second, depending on what investments you choose (assuming you put your money into something other than cash), you are likely to see meager short-term returns. Especially now, when interest rates are so low (near zero!). The question then becomes whether you will earn enough income to meet your expenses.
You have options, but in the current economic situation, “safe” equates to “low yield, low growth.” There’s no getting around it. A lot of retirees consider CDs and Treasury Inflation-Protected Securities (TIPS) to be good alternatives. Others include bonds (U.S. Treasuries and Corporate).
If you lean that way, keep in mind that those types of investments have risks as well. The primary risk is inflation; aside from the TIPS, they are nominal instruments, and they will decline in real value when inflation occurs. And with current rates so low, your income from them will be minimal.
Are Annuities the Ultimate Answer?
You may think now is the time to listen to the ads on TV and the internet and purchase one of those annuity products that promise some market upside with no downside when everything goes south (sounds appealing, right?).
I am not suggesting that you should not consider an annuity as part of your retirement strategy. I think annuities may have a place in many people’s plans.
But annuities are not pure market growth products. There is no optimal annuity strategy where you get the potential for full market growth (which should come back eventually), with little or no downside.
Therefore, making a quick decision, or feeling pressured into one, is never the right decision. I wrote this in an earlier article titled, “Stock Market Volatility and “The Prudent Man Rule“:
The prudent don’t act impulsively when investing; they learn to control their emotions and make decisions based on wisdom and knowledge gained through experience, exercising discipline, and restraint when others aren’t. During times of market upheaval, we often act irrationally and lose sight of our long-term financial goals.
Indexed annuities will provide CD-type returns, so “market returns” is not a totally accurate descriptor. They tie indexed annuity performance to market growth, but it does not fully reflect it.
To be fair, there is downside protection—something many retirees find very attractive. There are also income guarantees, but they come with extra-cost “riders” attached to the contract.
Variable annuities typically use underlying mutual-fund accounts, so they may perform slightly better during good markets. They also have income riders (to mitigate poor mutual fund performance), but these also come at a cost.
The main thing about annuities is that they are not investments. They are contracts between you and an insurance carrier. Like other kinds of insurance, annuities are about transferring risk.
The contractual guarantees are the most critical feature of annuities. You should purchase an annuity for what it does, not what it might do.
Annuities have a place in some people’s portfolios. I like immediate income annuities as part of a guaranteed income floor in retirement. Purchasing a single premium immediate annuity (SPIA) with part of your savings can remove some market risk exposure and ensures lifetime income to pay your living expenses.
If you are looking for one that does more than that, make sure you understand what they guarantee and what they don’t.
The bottom line is that there is no perfect annuity product that will solve all of your investment challenges. Nor is there an ideal answer for market volatility. But that doesn’t mean there aren’t things you can do.
Feeling the Need to Make Some Changes?
If you “feel” like you should do something, carefully consider your options. A lot depends on your age, risk tolerance, and lifestyle. Here are some to consider. Most should stay the course; others may need to take some action when the time is right.
Stay the course.
If you have a sound strategy, stick to it. Remember, stocks were at all-time highs before this recent correction, so we are just giving back some of the gains of the last few years. Also, even retirees have investment horizons much longer than a quarter or a year. You may be able to weather this storm even if it takes a few years to get back to 2018 levels.
If you’re younger, some advisors recommend that you use available cash to “dollar cost average” slowly into stocks to take advantage of the low prices. I can’t tell you whether this is a good time to buy stocks or not. They are a LOT cheaper than they were a few weeks ago, but they may be cheaper a few weeks from now.
If you are nearing or already in retirement, and are using a “total return strategy” (mix of growth and income investments), focus on the income portion and cash reserves (dividends, bond interest, savings accounts, money market funds, Treasuries, etc.).
Try to get through the current crisis with cash reserves, not by selling assets when they are way down. Avoid selling stocks in the short-term as they will likely recover, and you will need them to generate income in the future.
Don’t try to time the market.
I recently read that timing the market in the current environment is like trying to “catch a falling knife.”
Knowing when to buy and when to sell is a lot like that—no matter what you do, you’re more likely to get hurt than not.
Stocks are a lot cheaper than they were a month ago, but they may be less expensive in the future. Or maybe not. No one (except God, who knows all things) really knows.
Rebalance your current portfolio.
You can position your portfolio for the future by selling fixed-income investments that have held their own (or perhaps increased in value) and buying stock funds that have gotten severely beaten down.
I generally think its best to rebalance once a year or so and only if your allocation is off by about 10% or more. That may be the case now, but with the markets being so unstable, it may look very different a few months from now.
Diversify your investments.
Diversification is the practice of spreading your investment around different types of assets and securities to minimize the risk of your portfolio’s risk and volatility over time, which is the key to the long-term stability and success of your investments.
Cast your bread upon the waters, for you will find it after many days. Give a portion to seven, or even to eight, for you know not what disaster may happen on earth (Ecclesiastes 11:1-2).
It’s too late to make changes to your target asset allocation to deal with the current correction. Now may not be the time to add more conservative investments to your portfolio by selling and therefore taking permanent losses to your stock investments. It might be better to wait until the dust settles, and the market has returned to a reasonable level.
Consider an annuity.
We discussed this at length above, and in previous posts. You may benefit from adding one to your retirement income plan. If so, shop wisely.
I prefer immediate income annuities over their more costly and complicated cousins (indexed and variable), but I won’t tell you what you buy. Find a trusted financial advisor to assist you—one that will be entirely objective in looking at all your options.
Pursue Wisdom
No matter what, make sure you decide based on godly wisdom. Wise investing means taking risks that you understand and believe you can accept. They will take time to grow and yield an income because they never go up in a continuous straight line.
The worst-case scenario is that you feel compelled to sell investments when the market is down. That is why maintaining a cash reserve (in your retirement account if you are retired), or an emergency fund (if you’re not) for unexpected events, no matter how major, is so important.