Dear Carrie: I’m 70, and like a lot of older investors, I was still heavily invested in the stock market when this economy hit dangerous territory. At this stage of life, I don’t have a lot of time to “make it back” in the market. What’s the best plan for selling off stocks and moving into more secure savings?—A Reader
Dear Reader: The last several months have been a whipsaw for a lot of people. And even though the market has largely recovered from the sharp drawdown when the pandemic hit (at least for now), many investors are worried about how best to protect themselves if and when it happens again. Those worries can be even greater for older investors who are close to or in retirement. At this point, the money you’ve accumulated isn’t just a number related to a future goal; it’s what you need to live on now.
I hear similar concerns from many older readers. Even in the best of times, the transition from saving to spending isn’t just financial; it’s emotional. In times of high uncertainty, those emotions run even higher. But while that may leave you with a strong desire to sell your stock holdings, you’re absolutely right that it’s best to have a plan—and that plan should be determined by your own circumstances, not by what the market’s doing at the moment. Let’s look at some important things to consider before you make any changes.
Start With Your Current Financial Situation
Your first step should be to get a clear understanding of where you stand now, looking at three criteria: your current net worth, your projected cash flow over the next several years, and your current asset allocation.
Your net worth (what you owe minus everything you own) gives you a big-picture view of your holdings. Zeroing in on your essential versus discretionary expenses gives you a good sense of your cash needs and how much you’ll need to withdraw from your portfolio each year. Finally, how your portfolio is currently divided between stocks, bonds, and cash completes the picture. Together, these three pieces of information can provide context for any changes you might want to make now and in the future.
Let Your Timeline Guide You
To weather a bear market, it’s generally recommended that retirees have enough to cover 2 to 4 years of essential expenses in readily accessible holdings like fixed income and cash. The problem, of course, is that these investments don’t yield much in today’s low-interest environment. But they do provide stability. Plus, it can make you feel more secure to know you have the money you need without being forced to sell in a down market.
Get specific about when you’ll need your money to help you decide where to keep it. Ideally, money you’ll need within two years should be in cash or cash equivalents. With your cash needs covered, consider bonds for money you’ll need in 3 to 5 years. Money you won’t need for 5 to 7 years or longer could be in stocks.
Avoid Dramatic Shifts
You may be more worried about market risk at this point in life—and market uncertainty may have you ready to bail out—but don’t let your emotions take over. Just as it’s never a good idea to try to time the market as you’re getting in, don’t try to time your way out either. Lessening the risk in your portfolio gradually is the most prudent. This is one of the reasons why managers of target-date funds gradually shift from stocks into bonds and cash the closer the investor gets to retirement.
You might also think of it this way. Many investors reach their stock positions by dollar-cost averaging: investing a set amount of money over time to smooth out the highs and lows. You could now apply that same principle in reverse by shifting your investments over time out of stocks and into bonds and cash.
Create Your Rebalance Plan
Let’s say your portfolio is currently 75 percent stocks and 25 percent fixed income and you want to reallocate to 50/50. Probably not the best move to immediately sell 25 percent of your stocks. Instead, to shift gradually, you could do the following:
• Have all dividends and interest transferred into a bank account rather than reinvesting them.
• Sell a percentage of your winners to reap the profits and realize some gains.
• Take advantage of tax-loss harvesting by selling some losers, using the losses to offset any taxable gains.
• Sell overweighted stocks in retirement accounts to create the cash for required minimum distributions, or RMDs (beginning after age 70 or 72 depending on your birthday).
By doing this periodically (weekly, monthly, quarterly, or even over different tax years), you’ll increase your cash holdings in a more balanced way and reduce the potential for regret if the market swiftly changes directions.
Just how much and how quickly you rebalance is up to you. The most important thing is to stay true to your feelings about risk, be realistic about how much risk you can afford to take at this point in life, and stick to your plan. An adviser can help with the specifics of how and when to rebalance across accounts as well as help you consider the tax implications. Some robo-advisers and managed accounts can also keep you balanced automatically.
As you contemplate moving away from stocks, remember that even in retirement—and that can be a long time these days—stocks may remain an important part of your portfolio. Keeping 20 percent to 30 percent in stocks is a way for even a conservative investor to maintain some opportunity for growth and keep up with inflation.
So, while it’s smart to have more in cash in your older years, maintaining a diversified portfolio is a strong hedge against uncertainty at any age. When it comes to investing, it’s never all or nothing.
Carrie Schwab-Pomerantz, a certified financial planner, is president of the Charles Schwab Foundation and author of “The Charles Schwab Guide to Finances After Fifty.”