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Should I stay the course if I’m near retirement?

For younger investors, time is on their side to capture the benefits of an eventual financial recovery. But what does it mean to retirees who need their nest eggs now? Kevin Grogan explains.

Transcript

Tim Maurer:
Hello and thank you for tuning in to Ask Buckingham. An ongoing video podcast series where we invite thought leaders across many disciplines and wealth management to respond to the questions on your mind. My name is Tim Maurer and I have the privilege of hosting these short Q&A discussions as the Director of Advisor Development for Buckingham Wealth Partners. And I want you to know that I’m also a wealth advisor with more than 20 years of experience and a client of the firm.

Tim Maurer:
The volume of information coming at us these days is so vast and the pace at which that information arrives is so fast, that it’s a struggle to keep up with what you need to know to make the best decisions for you and your family. Our hope therefore, is that this ongoing conversation will become a source of clarity in the midst of confusion and chaos, and provide insight that helps you better understand what’s going on in the world financially and otherwise. Today we’ll be hearing from Kevin Grogan, Buckingham’s Managing Director of Investment Strategy, and here’s the question we’ll be tackling Kevin. If I’m retired or soon to be, should I really be staying the course in this type of market environment?

Kevin Grogan:
I do think investors, whether they are recently retired or about to be retired, should stay the course in this market environment, provided that they have a well thought out financial plan to begin with. I think that’s the huge caveat that I would have on that question. So in our work here at Buckingham, when we have a client who’s about to retire, we always make sure they have enough safe, fixed income to fund their withdrawals here in the short term. So over the next three to five years that they will have a portion of their portfolio, at a minimum it will be there in good times and in bad, to help reduce the volatility of the portfolio. So presuming you have that kind of plan set up, then yes I do think investors should stick with their plan.

Kevin Grogan:
And then I think the other aspect of the question is that it’s important for investors to have an asset allocation that matches their willingness to take risks. So investors need to know upfront that stock markets are highly volatile, they can have deep declines like what we’ve seen here recently. And having enough safe, fixed income can help reduce the portfolio level volatility and help clients and investors sleep at night. And so I think building that into the plan up front, is important to helping investors stay the course, even through periods as difficult as what we’ve seen here recently.

Tim Maurer:
So in other words, you have to have a course in order to stay the course? I think that’s what I’m hearing you say.

Kevin Grogan:
Yes, absolutely.

Tim Maurer:
But even in a situation where an investor is looking at crazy volatility, if that is causing daily pain, if people are having trouble sleeping at night, are you saying that that could actually call for a calibration in that overall investment management plan?

Kevin Grogan:
Yes. So if your allocation isn’t comfortable for you, given the current market environment and maybe you overestimated how much risk you were willing to take on the front end. And that’s totally understandable. It’s been a long time since we’ve seen the market behave as it’s been behaving here recently, then it might be time to reevaluate how much you have invested in stocks and maybe dial that back based on a portfolio that might be more comfortable for you. So you can look back through examples of history to see kind of a worst calendar year, most portfolios lost from peak to trough. Using historical data, you can examine that to determine what might be comfortable moving forward. But even that sometimes isn’t good enough until you actually go through it in real life, like what we’re living through now. So if you’ve come to a new realization that the portfolio you’re in is causing you too much stress, it may be time to reevaluate that and dial back the amount of equity exposure you have in your portfolio.

Tim Maurer:
Kevin, I absolutely find that to be true. That the whole notion of having hypothetical risk tolerance conversations, it’s only worth so much. I absolutely think it’s an important part of the process, but we should be calibrating that risk tolerance as we experience life, as we experience ups in the market as well as downs, in order to really fine tune that asset allocation. So with that considered Kevin, with the notion that people could rely more on their fixed income in retirement as the engine for their income creation in the short term and look to their equities for the income creation in the longterm, what application might you have for us? Is there a particular conversation that investors should be having with their financial advisor?

Kevin Grogan:
Sure. I mean I think the biggest conversation to have, certainly as a new relationship starts up with an advisor or even as you’re approaching retirement, is being realistic about how much cash you’ll need from the portfolio on a year in and year out basis. I think advisors can be helpful in that discussion. But you need to be honest with yourself and with your advisor about how much you actually are planning on spending in retirement. Because I can say in my experience that a number can be difficult to pin down and sometimes it gets overestimated, sometimes it gets underestimated. So it can be helpful to track your spending for the months leading up to retirement and maybe for the first few months of retirement, to exactly know where all of your dollars are going so that your advisor can do a good job of planning out how much fixed income is needed in the portfolio.

Kevin Grogan:
And so I think that’s a one really good application, but then secondly, if you are finding that your portfolio is uncomfortable and causing you a lot of stress, don’t hesitate to call your advisor. That’s why your advisor is there is for times like this. One of many reasons your advisor’s there, but this is one of the main ones. Is in periods of market stress, you have someone that you can call to talk to about what’s happening in markets as we experience them on a day to day basis.

Tim Maurer:
Kevin Grogan, thank you so much. And thank you for tuning into this episode of Ask Buckingham. If you have a question that you’d like to see us address, you can do so by navigating to the website, askbuckingham.com or emailing your question to question@askbuckingham.com. Or make it easy on yourself, just click the corner of the screen and that’ll take you directly to the site where you can ask your question. Remember, there are no dumb questions per se, but unfortunately there are plenty of poor answers out there. Our hope is that in giving you straight answers to your questions, you’ll be able to apply that knowledge in pursuit of good financial decision making. So please follow us, and by all means, Ask Buckingham.

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