Thu, 29 Sep 2011
Small equity liquidations can relieve anxiety in a tough market, keeping investors on track in the longer term, says T. Rowe's Christine Fahlund.
Christine Benz: Hi, I'm Christine Benz for Morningstar.com. In volatile market environments, pre-retirees and retirees are often among the most nervous. Here to discuss some concrete coping strategies for this group is Christine Fahlund. She is on the phone with me. She is a senior financial planner with T. Rowe Price.
Chris, thanks so much for being here.
Christine Fahlund: Delighted.
Benz: So, Chris, you have come up with a list of things that people who are getting ready to retire or are already retired can do or think about in volatile times like the current ones. Let's talk about some other things that are on the top of your list.
Fahlund: First of all, I think Christine, if you have a financial advisor, this is a great time to be calling that individual because he or she may be able to talk you down off the ledge. Many of us are very anxious these days and talking to a professional as opposed to someone else in your family is the way to go there because their mind is still on the fundamentals as opposed to what the impact is going to be on your personal life.
Benz: Right, and that seems like that's a big part of why you'd paying an advisor for this kind of coaching at times like these?
Fahlund: Absolutely. It may have nothing to do with financial management at that point. It's probably more of an emotional relationship and having that person help you. They certainly understand what you're going through, and they are the right people to call.
Benz: Right. Now how about people who are feeling nervous and feeling inclined to start selling portions of their stock portfolio that have been the most volatile recently. What's your advice to them on that front?
Fahlund: Well, when we have investors call us at T. Rowe Price, one of our primary suggestions is that we acknowledge how worried they are, but at the same time we try to encourage them not to simply liquidate all their stocks at the bottom of the market. You don't want to lock in losses.
So instead, one way to sort of have your cake and eat it to is to start liquidating, say, 5% of your stocks in your portfolio this week and then maybe in a couple of weeks do another 5% if you're still feeling jittery. Eventually, the markets will calm and so will you, and at that point, you can rebalance and get back into the market with the appropriate asset allocation.
Benz: So that approach kind of recognizes that when things are very volatile, sometimes just saying "Stay the course" doesn't really cut it. People want to take some action, but you're point is to not take extreme action.
Benz: So you also have some advice for people who are looking at retiring but aren't yet retired. They are still employed. What's your advice to that group?
Fahlund: Stay in the workforce if you possibly can. This is certainly not an ideal time to get out. It's a lot less stressful for you to go through these volatile times if you still have a paycheck and benefits coming in. So, again, sort of a compromise if you are disappointed that you're going to keep working for a few more years, one thing you could do is to start playing sooner, so you'll still work but start doing some of those activities while you're still working instead of holding off on the trip to Thailand. Go now if you can while you're still working and that might be a nice middle ground for you.
Benz: You've done some work on this topic, Chris, where you've looked at people who are late in their careers and they start spending some of that money that they otherwise would contribute to their plans. That's kind of a nice way to split the difference: to continue working and hold off on social security benefits, but still enjoy some of the fruits of your labors.
Fahlund: Exactly, and we've even given this concept a name. We're calling it Practice Retirement. So you're still working, but you're trying out a lot of things, and that salary and benefits are there to cushion you. Well, you practice and perhaps make a few mistakes now and then, but you're starting to enjoy retirement now, even though you're still working.
Benz: Right. So what's your advice to people who are already retired? Any thoughts for them?
Fahlund: Yes. They are under the most duress, I would say, and understandably so. And we want to tell those individuals that one thing you could do is to right now liquidate, for example, enough of your investments to get you through the rest of the year, to pay your expenses for the rest of the year. So, if you're taking money out each month, why not take the next three months out now, put it in a money market, and then at least it will calm your nerves for the next three months. You'll know you have money being transferred to your bank account each month.
Then next year you could continue the process and maybe carve out all the money you're going to need for the year for your cash flow and put that in a money market fund. And then again, your biggest concern is that you're not going to have the money you need to support your lifestyle right now. So, if you can instead carve that out and put it in a money market fund, then at least that anxiety can go away.
Benz: So, you should use a version of that bucket approach that has become so popular among financial advisors?
Fahlund: Absolutely, anything to take the pressure off; you could do this for two or three years if you wanted to. The trade-off you're making is that of course your investment returns are going down, the more money you have in cash or short term. So, that's the trade-off, and it depends entirely on who you are and how much stress you're under, as to which choice you might make.
Benz: Right, right. So, Chris, you've also done a lot of work on withdrawal rates and maybe adjusting your withdrawal rate in times of extreme market duress. Talk about what you found there.
Benz: Well, one of the things we've been concerned about with the market duress is that, it might be advisable from a numeric standpoint for you to simply cut your spending in your withdrawals in half. Well, that's nice but it's not realistic. So, you have a budget, and you have to support that budget. So, we went back to the drawing board to try to look at the concept of taking a certain amount the first year from your nest egg and then increasing that amount every year for inflation.
As we examined the alternatives, one that became very attractive was this idea of, if you're in a bear market and ideally you'd be cutting back on how much you're withdrawing--but that's not realistic--how about holding your withdrawals fixed for the next few years, maybe three to five years? The advantage there is that you don't get as far off track as you would if you were still maintaining those increases every year. So, you're not depleting your portfolios fast. The markets will rebound eventually, and you'll be back on track with taking increased withdrawals each year.
Then while you're in this period of fixed income, you're going to also be working on your budget and making some adjustments to your lifestyle that could ultimately help you live on a little bit less income than you're trying to live on now. So, an example might be that you have two cars now and you cut back to being a one-car family.
Benz: And see if you can make do with just one car.
Fahlund: That's right, but you can't do those things overnight. That's why by holding your income fixed for say three years, over a three-year period, you can start to make some fairly significant adjustments, if you need to.
Benz: Right. Maybe by then the market will have rebounded and you'll have made those adjustments, but you might not have to live with them forever.
Fahlund: That would be ideal.
Benz: Well, Chris, thanks so much for sharing those very practical concrete strategies. We very much appreciate you being here.
Fahlund: Well, thanks for inviting me.
Benz: Thanks for watching. I'm Christine Benz for Morningstar.com.