Despite a 6% increase today (March 17), the S&P 500 index is down
almost 22% for the year and almost 25% for the last month. We are now
officially in a Bear Market. We have been reading lots of
recommendations from retirement experts on what retirees should be doing
in response. Therefore, we thought we would add a few of our thoughts
on the subject.
This post is a follow-up to our post of April 23, 2018, “Ok Retirees, What is Your Plan for Dealing with the Upcoming
Bear Stock Market?” and our post of July 9, 2019, “Ok Retirees, Now May
be a Good Time to Shore Up Your Floor Portfolio.”
In summary, we
believe that probably no immediate action is required at this time
(except for frequent hand-washing, trying your best to follow the social
distancing recommendations and trying not to irritate your significant
other more than normally), but assuming the markets eventually settle
down in significant negative territory for the year, you may wish to
consider the specific discretionary expenses you might be willing to
reduce until markets sufficiently recover.
As discussed in our Recommended 7-Step Planning Process, we recommend you establish a Floor Portfolio of low-risk investments to fund your current and future essential expenses and an Upside Portfolio of riskier investments to fund your current and future discretionary expenses. If
you have been following this liability driven investment (LDI)
approach, then the current drop in equities will generally (hopefully)
only affect the amount of discretionary expenses you may be able to
fund.
Some retirement experts may tell you that since the markets
are currently down (and the reason is largely due to the novel
coronavirus), now is a good time to increase your investment in them
(buy low, sell high). This may make sense if you have non-risky assets
in your Upside Portfolio, but it will generally be a risky strategy to
liquidate your floor assets for this purpose (unless you truly believe
that your future essential expenses will be lower than you originally
estimated).
We suggest that you revisit your January 1, 2020
actuarial valuation using the same ABC for retiree (single or couple)
workbook that you used to develop your 2020 spending budget and re-run
this valuation with lower assets. This will give you a sense of how
much you may have to reduce your discretionary spending next year if
equities remain at current depressed levels for the remainder of the
year (assuming you don’t smooth the results). It may also influence
your spending for the rest of this year.
It is possible that once
the virus issue has been addressed the markets may return to previous
levels (or higher). Therefore, it may be premature at this time to cut
spending. On the other hand, reducing expenses at this time may
actually be somewhat easier if we are all required to “shelter in place”
for a significant length of time.
We are actuaries, not
investment advisors, so you shouldn’t interpret this (or any other of
our posts) as providing specific investment advice.
We wish you good health during these trying times.
