When the Covid-19 crisis started to go on the boil in Asia, the heat could be felt everywhere in the world. Markets have been volatile and the rand has devalued, making many of us feel poorer. Businesses took a major hit as containment measures shut down economies, turning off cash taps and eliminating demand for many goods and services. Few saw this one coming, which is why many companies have been unable to survive these past months and have laid off staff. For retirees and near retirees, Covid-19 has changed the investment rules. It’s quite clear, for example, that having a three-month cash nest egg is no longer enough to withstand a major episode like a pandemic. Assets like property can’t be liquidated to help you quickly access funds and it’s often a bad idea to sell stocks when they have taken a hammering. But having too much cash is risky, too, with signs that inflation will gather pace to compensate for government bail-out spending across the globe and leave your purchasing power behind. The Wall Street Journal sets out how financial strategies are changing as retirees and near retirees try to cope with the Covid-19 induced downturn. – Jackie Cameron
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Financial strategies for retirees (or near retirees) in this downturn
(The Wall Street Journal) – For investors in or near retirement, the coronavirus presents more than just a health risk. Investors who rely on their portfolio for income are faced with budgetary uncertainty because of the financial marketsâ plunge in recent weeks and continued volatility.
Itâs a case of terrible timing. If you retire into a bull market, investment gains will offset withdrawals used for income once youâve stopped making regular savings contributions. However, if you make those withdrawals during a bear market, you end up compounding losses by taking cash out while your investments are losing money. Random chance determines which market you end up in at the time you retire.
Financial planning canât fully protect investors from the kind of market upheaval weâre experiencing now. But there are some steps investors can take to put themselves in the best position to manage the situation.
Cover this year
Ken Van Leeuwen, founder and managing director of financial advisory Van Leeuwen & Co., suggests that – no matter what the markets are doing – retirees set aside all the cash theyâll need for each year at the start of the year, so that they donât end up under immediate pressure if market conditions change. If retirees didnât do this in January, it still makes sense to set the money aside now so that expenses for the remainder of 2020 are covered and investors have time to consider any possible changes to their portfolio with less stress, he says.
This is also a good time to reassess budgets to determine whether there are places where expenses can be cut temporarily, Mr. Van Leeuwen says.
For investors who were near retirement and now find themselves laid off, setting aside enough cash to cover the remainder of this year will help lessen the blow of abrupt job loss. Budgeting will also be important for these investors, as well as planning around Social Security and taxes.
âIf youâre now a year or two years earlier into retirement than you anticipated, you need to rethink your immediate needs,â Mr. Van Leeuwen says. âWhere can you make cuts? Look at vacation plans, tax strategies.â The cuts donât have to be permanent, but they can be helpful now. Itâs also important to think through the impact of taking Social Security early for those who qualify, or applying for unemployment insurance. Both options come with tax implications. A financial adviser will be able to help identify the best choice.
Take another look
This is also a good time for investors to reassess their portfolio, says Barry Mandinach, executive vice president at financial adviser Virtus Investment Partners.
Portfolios tend to creep during long bull markets like the one that ended as the coronavirus pandemic spread, with the percentage allocated to stocks climbing as share prices rise. That may have left some investors – especially those who rely on their portfolios for income, or plan to soon – overallocated to stocks, many in passive index funds that are still down sharply despite the marketâs partial rebound from its March low. Many investors – again, especially those focused on income – also shifted in recent years toward riskier and relatively illiquid investments such as emerging-market and high-yield debt as they searched for better returns than they could get from more-mainstream fixed-income assets with interest rates staying so low. Those illiquid assets are harder to divest in a crisis and can tie up cash.
Mr. Mandinach says market volatility can provide an opportunity to identify these and other vulnerabilities in a portfolio and correct them. âInvestors are going to have to accept more volatility than theyâre used to, at least over the near to medium term,â he says. âItâs also going to be difficult to reach retirement goals in a traditional 60/40 portfolio,â he adds, referring to a portfolio mix of 60% stocks and 40% bonds. âSo, we advise revisiting portfolio construction to incorporate strategies that add resiliency.â
That could mean, for instance, adding actively managed funds into a portfolioâs investment mix, he says, so that fund managers can pursue strategies that might produce better results in the current market than passively following its ups and downs. Investors who are at or near retirement will want to work with their financial adviser to identify strategies that will preserve capital for portfolios that have a shorter time horizon in which to make up losses.
Revisiting portfolio construction is also important for investors who are in target-date funds that are near the end of their so-called glide paths – the point where typically they have nearly completed a shift to a very conservative bond-heavy mix. A financial adviser can recommend more-opportunistic strategies that can be combined with a target-date fund to help even out overall performance. Options include actively managed strategies or shorter-duration fixed-income investments, among others.
Take advantage
There are also ways for some investors to take advantage of the marketâs decline.
Investors with money in a traditional IRA who are considering converting to a Roth IRA will find thatâs cheaper to do in a down market. Converting from a traditional IRA to a Roth IRA can be beneficial for some investors who want to avoid mandatory minimum payouts from their retirement accounts and want the opportunity to pass assets to their heirs tax-free.
Investors who convert to a Roth have to pay taxes on the amount they convert. If the amount is lower at the point of conversion because of market declines, itâs going to be cheaper to make that change. Any subsequent asset growth inside the Roth structure will be tax-free. Investors who are very close to retirement or in retirement will need to work with a tax professional to find out if a conversion makes sense given the tax payment it entails.
For investors with taxable investment accounts, another option is tax-loss harvesting – selling shares at a loss to help offset taxes on income or on capital gains on other securities in the same tax year or in the future. âIf you take those losses now and raise cash, then you can put that to work elsewhere,â Mr. Van Leeuwen says. The money can be reinvested or used to cover expenses. Investors should work closely with their accountant and financial adviser to determine the best time to take losses.
The home front
Homeowners have additional considerations. Those whose retirement strategy includes selling a home should expect to extend the timeline to do that by one to three years. Mortgage rates are likely to remain at record lows for the foreseeable future, which is a net positive for sellers, but the broad economy will need to rebound before many people will be able to buy.
Also, in response to the crisis, banks in several states are waiving mortgage payments for 90 days without penalties. Taking advantage of this can relieve some immediate budgetary pressure without affecting borrowersâ credit ratings.
– Ms. McCann is a writer in New York. She can be reached at [email protected].
