Do you remember Pat Benatar anthem ‘Love Is a Battlefield’ from the 80’s?
Well, someone should cover it and change the text to “Pension is a minefield.”
Read: Boomers retire in their own way
That’s what many baby boomers learn the hard way or relearn. Already outside the workforce or on the verge of retirement, these people have been hit by the triple blow of the coronavirus pandemic, the deepest recession since the Great Depression and massive market sales that the Dow Jones Industrial Average DJIA seized took,
and S&P 500 index SPX,
decreased by a third (although both have recovered almost all of their losses).
This made for professional investors, although the all-knowing millennial day traders on Robinhood might bring in hundreds and say “no problemo.” The rest of us, who have to figure out how to live our money through an indefinite life, are confused to say the least. And when people are confused, they make mistakes – sometimes big ones.
An article in The Wall Street Journal recently illustrated that perfectly (subscription required). It targeted two over-60s – an ophthalmologist and a contractor – who made the opposite mistakes. One had too much stock and sold almost everything at the bottom in March. The other came out of stock during the last crash of 2008-2009 and never returned.
What these mistakes have in common is that the two boomers lack a clear financial plan or the discipline to stick to them. And in an all too human way, they let their emotions get the best out of themselves.
Dr. Craig Sklar, the Journal reported, “sold many of his shares at a loss between January and early March.” He still has some shares now, but how does ‘more money as a percentage of his portfolio than he has in decades’.
He was not alone. According to Fidelity Investments, nearly a third of customers age 65 and older sold all their shares sometime between February and May. That means they panicked and were sold at the worst time, missing the snapback stock rally triggered by the fiscal stimulus from Congress and the Federal Reserve. Boomers took a disproportionate hit – only 18% of investors in all age groups made nearly bottom of the stock, Fidelity reported.
“I don’t have 10 to 15 years to recover my losses,” Sklar explained to The Journal, one reason that must have motivated panic sales for many boomers. “At some point, I need my money to live on.”
At a given moment. But not now. We’ll come back to that later.
The story didn’t tell what percentage of his retirement portfolio Sklar had in stock, but he advises his 30-year-old children to keep 100% of them in shares. In the first quarter of 2019, only 7% of Fidelity’s investors had invested their 401 (k) s 100% in shares, half the percentage in 2009. That’s progress, but who knows how many boomers invested 80% or more in stocks whose risk was discounted or mitigated?
The other boomer in the story, Phillip Eberlin, 66, owns a woodwork restoration company in the Chicago area. He planned to retire in a few years, but the work has dried up due to coronavirus blockages and the poor economy. “What I would rather not do is invest in this and then see the market drop by 40 to 50%,” said Eberlin, who has much of his retirement money in certificates of deposit and cash, which earn almost nothing.
And there you have the riddle for people approaching retirement – how much to risk in a stock market that has stalled 50% twice and sold out 30% in the past 20 years?
Admittedly, things may now be even more out of the blue, with what appears to be a permanent “move” of the Fed to the stock market. But the answer to that question isn’t 100% in stock (much too risky) or zero (you’re missing every chance of seeing your money grow over time). I think it’s closer to 50% stocks when you’re in your 60s or nearing your retirement year. That’s actually what most Americans own, especially as they age.
But I would also like the expected expenditure in cash or cash for at least three years. One way to determine that is to calculate your required annual minimum distributions (RMDs) from your retirement accounts. For every 5% more inventory you want to keep, I’d keep an extra year in cash. So if you have 60% in stock, you should have five years of cash. But no more.
The money is also there for psychological reasons, to avoid selling at the bottom or not investing in stocks at all. As we age, we don’t have time to recoup our losses. But we still can’t afford to stay out of the game altogether. So you need a plan and the money to stick to it.