The Market Fall-Out
Question: Help! I retired a couple years ago and the market was going up. Now it's going down, down, and more down. How do I stabilize my savings and IRA money that I'm living on? I'm not on Social Security just yet (I'm 61). Do I need to go back to work for awhile? Ickkkk, I hope not! Kojis
Answer: You're far from alone in your concerns. It's frightening right now with the stock market wildly plunging one day, recovering the next, only to lose even more ground in following days. The housing market continues to tank. The consumer credit default wave is spreading from subprime mortgages to home equity loans, credit cards, auto loans, and other types of consumer credit. A recession is likely.
Truth is, while we're in the midst of turmoil, it's usually a mistake to make any dramatic moves. That doesn't mean you shouldn't go more conservative. But I would use this as a wake-up call to reassess your whole portfolio. You should always pay attention to the downside--what could go wrong. And if you lock in the essentials by investing safely you can sleep at night.
So, as you know, one way to protect yourself is to diversify. Right now, while the stock market is down about 16% from its October 2007 high, the U.S. government bond market has strongly rallied.
It can also mean putting money into cash (by cash I mean U.S. Treasury bills, conservative money market mutual funds, and other creditworthy short-term securities). To be sure, the investment price you pay for credit quality is a lower yield. But cash will hold its value.
My next thought has to do with this question: What is the biggest risk confronting savers? Recessions? Bubbles? Bear market? Yes, all these traumatic events batter savings and undermine confidence. But inflation, a sustained rise in the overall price level, tops the list. The purchasing power of a dollar declines year after year when inflation drives up the costs of goods and services. One hundred dollars loses half its value in 20 years with a 3.5% average annual rate of inflation. The same sum falls by about a third over two decades even at a modest 2% inflation rate.
That's why I'd put money into Treasury inflation protected securities, or Tips. For practical purposes, it's a completely safe asset that adjusts to changes in the consumer price index. The CPI might not exactly match your basket of spending, but its pretty close. Tips can protect your money from inflation for 20 years.
Now, a well-known drawback to TIPS for individual investors is that taxes are paid on the unrealized annual inflation-adjusted gains. Yet there are plenty of ways to avoid the tax on phantom income, such as owning TIPS in a tax-sheltered account like an IRA. Another alternative is the inflation-protected U.S. savings bond, the so-called I-bond. The investment compounds tax deferred until the bonds are cashed in.
Certified financial planners (CFPs) are expensive. There's no way around it. But one of the best investments someone can make in your circumstances is to spend the time finding a fee-only certified financial planer that can go over your portfolio, assets, goals, dreams, and give you a true sense of the trade-offs you face.
And, yes, going back to work may be one of those options.