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Are You and Your Retirement Investments Prepared for Correction?

“The older the current bull market gets, the more stories you’re likely to read about how this is an awful time to retire.”


It’s a challenge since the market has quadrupled since 2009, when the recovery from 2008 got underway. Returns on bonds and cash remain low. If you haven’t rebalanced your portfolio in a while, it’s likely you have a high degree of exposure to equities.

The rebalancing should be done now, before markets begin any roller coaster rides and rational thinking tends to go out the window. The proper asset allocation depends on your income needs and your risk tolerance. Financial planners advise people to have a few years’ worth of withdrawals in safer, low-risk investments, so they are not asking to sell everything when markets adjust.

One planner has his clients keep one to three years’ worth of expenses in case, plus seven to nine years’ worth in bonds. As a result, they have 10 years before they need to sell in the event of a correction.

You never want to sell into a correction, but many people panic and do just that.

Some advisors are sticking with the 4% rule, which says that retirees can minimize their risks by withdrawing 4% of their portfolios in the first year of retirement and increasing the amount in years after that, by the inflation rate. Many think this rule will not work in an environment of low returns.

Another approach is to completely forgo inflation adjustments in bad years. If you start at a 4.5% withdrawal rate, and then trim spending when portfolios lose money, that may be more flexible.

Reducing expenses and maximizing Social Security benefits is a smart approach for retirees. The more guaranteed income you have, the less risk you need to take in your investments.

Retirees have all the money they need in a perfect world based on their own investments, retirement accounts and Social Security.  However, if they don’t, they can create more income by purchasing a fixed annuity or tapping the equity in their home through a reverse mortgage.

Buyers pay a lump sum to the insurance company for a fixed annuity and then receive a fixed monthly amount that can last a lifetime. A reverse mortgage gives homeowners access to the equity in their home, which does not need to be paid back until the owner sells, dies or moves. Since there are costs and restrictions on both these investment strategies, it would be wise to do your homework before embarking on either one.

Reference: Associated Press (Aug. 20, 2018) “How to reset retirement plans to weather a downturn”

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