The problem with running from volatility: What are your alternatives? – Getty Images/iStockphoto
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I’m a 65-year-old retiree. I just saw a Suze Orman post about the stock market falling and it made me mad. “Take a pause, take a breath … We knew this would happen and now it has, so don’t be freaked out. Take it day by day,” she said. She sounds like my financial adviser — head-in-the-sand clueless.
But what do we do? Do we sell and move to anything that’s possibly still safe? And then what, do we take a big bad tax hit? And watch our Medicare costs rise? (What am I saying? Medicare could be next to just go completely.) Does anyone have advice that is better than “the market always comes back, stay the course”?
Ready to Run
I know the headlines are scary. I don’t know if you’ll find my advice soothing, but I’m going to start with a reality check. If you’re a new retiree and have at least a 50-50 portfolio, or maybe even more conservative than that, then your bottom line is not the big red number flashing next to the S&P 500 SPX or Dow Jones Industrial Average DJIA tickers on your screen.
I took a look at the target-date retirement funds for people intending to retire in 2025, with help from Morningstar Direct. The top fund in that category, the Vanguard Target Retirement 2025 Fund VTTVX, was down just 1.6% in the past week through Thursday, compared with 5.2% for the S&P 500 index. In the past month, through Thursday, that fund is down just 0.4%, compared with down 7.9% for the S&P 500.
The Vanguard 2025 fund has about a 50-50 split right now between equities and fixed income, according to its prospectus, and holds about $75 billion of the $832 billion in 2025 target-date funds. Investments like this are designed to glide over time to be more conservative, at the direction of the fund managers, and are popular in workplace retirement plans. About 30% of employees have their 401(k)s invested in target-date funds, according to the Investment Company Institute, and they are even more popular among younger employees who are often auto-enrolled and auto-invested in such plans.
I say this to get across the point that, yes, your retirement-portfolio balance has dipped, but it’s maybe not as bad as it seems at the moment. The Vanguard target-date fund is likely more a proxy for what’s in your own account statement than the headline S&P 500 numbers of the day. If it’s really freaking you out, then don’t listen to the advice to stick your head in the sand and look into it.
Before you just blindly sell and stick your cash under the proverbial mattress, evaluate your actual holdings and think about where you can do better. Make sure to consider this: You’re 65 and likely started investing in a workplace plan something like 40 years ago. The three-year return on that Vanguard 2025 portfolio is 3.6% and the five-year return is 9%. Your lifetime gain is significant — not up as high as the S&P 500, but still up.
A balanced portfolio that gets more conservative as you age is designed for hard times just like this. Your risk in the stock market is balanced by investments in fixed income like government and corporate bonds. In bad times, that’s a buffer against significant losses. In the good times, you’re getting less gains, but still making something.
What are your alternatives? As you mention, cashing out as a new retiree can have consequences. If you keep the money inside a tax-deferred account and just change the investment options, it won’t impact your income tax or Medicare premiums, but it can leave you at a loss compared with inflation, which is still running high. You can either go riskier or go safer — and both are probably bad options, inversely.
If you get more conservative, you won’t get to 9% in any given year. A Treasury bond or money-market fund won’t even get you half that now, and will drop along with interest rates over time. If it turns out we’re in a temporary downturn, you’ll miss out on the upswing. If you go more into stocks, you could end up permanently denting your portfolio — and given your outlook, this is the least likely of your choices.
If you cash out in a taxable account then, yes, you could incur capital-gains taxes, because most likely you are not at a loss in any of your positions yet overall, compared with how much you paid initially. That could push you into IRMAA surcharges that will make your Medicare more expensive and have all sorts of other ancillary effects, including also that missed opportunity on the upswing.
The thing to remember overall is that the stock market’s ups and downs are theoretical until you press the buy or sell button in your brokerage account. As a new retiree, you only have to think about right now: That is the money you are going to spend this year on living expenses. Make sure you have that in cash.
It’s probable that you took a distribution from a retirement account at the end of last year to tide you through this year, and will keep up that distribution schedule through retirement, even before you get to the age of required minimum distributions when the government makes you do this.
That’s not sticking your head in the sand — that’s just being smart about your retirement spending strategy.
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