Have we learned anything in the last decade about how to protect our retirements in case the markets take a nosedive, as they historically do every seven to eight years? We’re well overdue for a cyclical stock market crash—10 years out from the Great Recession of 2008, which was second only to the Great Depression of the 1930s in terms of widespread economic devastation.
The 2008 recession wiped out retirement accounts and forced retirees back to work at whatever jobs they could get. The thousands of people 65+ who couldn’t work were forced to downsize, move in with the kids, or scrimp and scrape by as best they could. No one wants to experience the 2008 situation again or the downturn in 2001 for that matter.
The point is, market crashes happen, and we are two to three years overdue for the next one. If you are getting close to retirement, you need to take measures to protect yourself! Ignorance is not bliss. It can hurt you.
Here are five things to do differently than most retirees did in 2008:
1. Don’t Manage Your Money Yourself
Studies show that the individual investor loses out. Dalbar released a study spanning 30 years, from 1986 to 2015. The study showed “for the 30 years ended December 31, 2015, the S&P 500 index produced an annual return of 10.35%, while the average equity mutual fund investor earned only 3.66%.”
Fidelity conducted a similar study focused on the Magellan Fund. Their study showed that from 1977 to 1990 the fund averaged a 29% annualized return over that time frame. The fund was, hands down, one of the best, but the average investor in the same fund made only 7% during the same period. Why the difference? Emotions. There’s a behavior gap. Investors have a history of selling low and buying high. We’re talking human psychology here. There’s the tendency for investors to withdraw money when markets drop, then reinvest when markets are high.
If you’re managing your own assets, don’t. Don’t try to read advice, which is often conflicting, on the internet and think you can do it yourself. Don’t try to time the market. You can’t. No one can. Find a financial professional you can trust to handle your retirement planning for you. (See #3.)
2. Get Away From The Pie Chart Accumulation Model
Seemingly, 90% of Americans are using a pie chart. Unfortunately, most pre-retirees have no idea how risky their portfolio really is. It’s not okay to move money over into more bond funds as you get older and call those “safe,” because they’re not. (See #5.) Most retirees had the bulk of their money in bond funds in 2008, but that didn’t help them. They lost big time, and they didn’t have the time to wait until the market recovered. They needed to keep withdrawing money to live on.
Accumulation mode (when you’re young) is much different than distribution mode (at retirement). They represent completely different phases of life. The pie chart of stocks and bonds no longer works.
There is a huge difference between the asset accumulation with its “buy-and-hold” thinking that works in your 20s, 30s, and 40s, versus the safety and protection of the type of assets and retirement planning you should be seeking as you move closer to retirement. In accumulation mode, you have the time to wait out bear markets.
Retirement distribution mode is a whole different story, and here’s why: When you stop working, you no longer have a paycheck coming in. You have a pile of money, but you don’t know how to efficiently draw from that money. Properly pulling money from an investment portfolio takes a retirement specialist (someone that understands how to structure a distribution plan.)
A comprehensive retirement distribution plan should show you exactly how you will be able to take a monthly income, support your lifestyle, minimize taxation, handle inflation, cover risks like healthcare, and, most importantly, avoid running out of money in retirement. A pie chart doesn’t cut it.
3. Get Away From Brokers. Find A Fiduciary For Retirement.
According to Art Levitt, if you’re working with more than $50,000 of investable assets in the market, you should fire your broker and find an investment advisor, who is a fiduciary. The trouble is, a lot of financial professionals claim to be fiduciaries, but they aren’t. Only 1.6% of all financial professionals are actually true fiduciaries, according to Tony Robbins.
Take big-name brokers and bankers, for example. They are actually licensed to sell investment products and make a commission on them. They have to follow suitability standards, but they only sell the products that their company offers. If they make more commission on one product than another, they can legally offer that without disclosing that information to you. Legally, they can take kick-backs from mutual fund companies without telling you.
A fiduciary is held to different standards. They are required to disclose all fees and to only recommend what is in your best interest, even if it doesn’t make them any money at all.
Here’s how to determine whether or not an advisor is actually a fiduciary. (All three must be present.)
- They are a completely independent company. No one is telling them what to buy and sell or what they can or can’t recommend. You get access to product and investments that you wouldn’t normally have access to.
- They are Series 65 licensed, which means they can’t receive a commission on investments. It doesn’t matter what product or strategy they recommend as long as it’s the right one for you.
- They are structured as an RIA (Registered Investment Advisory), which means they are fee-based only. They want to hold you accountable and help you get better results because that makes them more money, too. It’s a win-win. You’re getting advice legally in your best interest instead of working with salespeople.
Here’s the other thing: fiduciary retirement planners bring more to the table than just investments. They coordinate for tax efficiency, estate planning, legacy planning, and they help you meet the many other retirement risks you will face.
Don’t let the banker and broker salespeople talk you into risk that you don’t need. If, and when, the market tanks, don’t be a part of it. Find a fiduciary who specializes in the full scope of retirement planning.
4. Avoid The 4% Rule. Never Withdraw From A Fluctuating Account.
Even though the creator of the 4% Rule said it was faulty after the recession in 2008, most financial salespeople are still using it for retirees in conjunction with the risky pie chart containing more and more bond funds as you get closer to retirement age. Both stocks and bond funds fluctuate wildly because they are subject to market volatility.
What happens if you have all your money in a pie chart of bond funds and stock funds in the stock market and start taking 4% out? Well, the first few years of market performance after you retire become make or break. Timing is everything, and you can’t predict the market. For example, if you would have put $100,000 in the total S&P in 1988, left it there, and reinvested the dividends for 15 years, it would have grown by around 650%. If you would have invested that same amount for 15 years in the very same way starting in the year 2000, it would only have grown around 237%. That’s a huge difference.
That’s an average difference of around 7% each year, which sounds acceptable, but isn’t when it comes to retirement. If you put your assets in a fund that tanks during the first year, it takes a lot longer than one year to get back to break even. if you start taking 4% out every year, you run out of money—just like thousands of retirees did in 2008.
Never draw income from a fluctuating account. When you draw income from a fluctuating account, you are comprising the gains when the markets are up, and you are accentuating losses when the market’s down. It’s financial suicide.
5. Don’t Believe That “Bonds” Are Safe
If interest rates go up, bond funds lose money; they go down. if you think diversifying your portfolio between various types of bonds, stocks, ETFs, and mutual funds will protect you in the next market crash, you’re wrong. Bond funds are not safe. They are affected by the overall stock market and other economic indicators. Bond funds went down in 2008. They go down in every bear market.
We are at a market top right now. It’s kind of like when you hear that eerie music in a scary movie. Nothing has happened yet, but it’s going to.
There are three reasons a bull market dies. One, rising interest rates, which affect housing, companies, government, personal debt, and more. Two, higher oil prices, which can be thought of as a tax on consumers. Three, overly high stock market valuations. Experts are seeing all of these right now. JPMorgan Chase Co-president, Daniel Pinto, warns that equity markets could fall as much as 40% in the next two or three years.
You’ve worked too hard for too long to have your retirement money disappear in the next market crash. Don’t let that happen.
