We are ‘healthy boomers’ in our 60s with a net worth of $4.2 million. Is it time to diversify?
Dear Quentin,
We are a healthy, retired couple (69 and 64 years old). We have always managed our own investments.
We currently have 60% in stocks and 40% in cash equivalents in our investment portfolio. Based on the “100 minus your age rule” we would be considered overweight in stocks; even at the newer version of “120 minus your age,” we are pushing it. However, we keep doing the math and don’t understand what we may be missing.
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Our total net worth is $4.2 million. We have $300,000 in non-retirement funds (60% cash), $1 million in a home, retirement accounts with $1.1 million in CDs and $1.8 million in stock funds. We have no debt and live comfortably on $150,000 per year. My husband will begin taking Social Security of $55,000 per year in 2025, and I will collect $28,000 in 2027.
In a worst-case scenario, we fear a stock-market bust. One could occur, or at least a significant downturn. In that case, we have 10-plus years of cash we can draw upon as the market recovers. Otherwise, we could continue to benefit from market growth and slowly whittle down the percentage of stock ownership as we age.
Please let me know what I may have left out of our consideration.
Healthy Boomers
Dear Healthy Boomers,
Ten years is a long time to ride out a stock-market bust.
Let’s deal with your worst nightmares first. After the 1929 market crash, when the stock market eventually lost roughly 90% of its value, the Dow Jones Industrial Average DJIA took more than 25 years (Nov. 23, 1954) before it closed above the level at which it closed on that fateful day. But analysts say it actually took five to 10 years, accounting for the deflation.
Among the many lessons from the Great Depression (and 2008 financial crash) is that one man’s meat is another man’s tofu, where one person sees stability, another expects chaos. The Yale economist Irving Fisher famously said stock-market prices reached “what looks like a permanently high plateau,” according to this Oct. 16, 1929 report in the New York Times.
Meanwhile, in a bulletin on March 25, 1929, the Federal Reserve warned that “excessive or too rapid growth in any field of credit, whether it be commerce, industry, agriculture, or the trading in securities, is a matter of concern to the Federal Reserve system. Too rapid expansion of bank credit in any field may result in serious financial disorganization…”
It took more than five years for the market to recover from the 2008 financial crisis, which was caused in part by predatory and subprime lending in the mortgage market and a lack of financial regulation. Diversification is also key to weather such storms: many companies survived the 1929 and 2008 financial crashes and, yes, some did not.
The complexities of a cash cushion in retirement
You have no debt and your Social Security will give you an income of $83,000 a year, more than half of your pre-retirement expenses, not accounting for your $2.9 million in retirement accounts and CDs. Plus, you have no mortgage. You’ve worked hard and planned wisely in advance of a comfortable retirement and peace of mind. You can afford both.
Some people who write to this column compare and despair. You don’t have that problem, so you can worry less about what you may or may not have missed. The average retirement income for adults 65 and older last year was $83,085 when adjusted for inflation, according to Retireguide.com. And the median income? That’s $52,575 a year.
For others reading this, you must also be 62 to claim Social Security spousal benefits or have a child who is either under 16 or already receiving Social Security. The amount also depends on whether the higher-earning spouse started claiming at 62, or waited until their full retirement age. (It sounds like your husband is waiting until he turns 70).
Now that I have congratulated you, which seems appropriate under the circumstances, let’s talk about the $67,000 shortfall, which amounts to 2% of your portfolio, according to Paul Karger, co-founder and managing partner of TwinFocus, a wealth advisory firm. “This should be easily attainable given current rates and a balanced portfolio approach to stocks and bonds,” he says.
You have, for the most part, sheltered yourself against a major stock-market downturn, given your current allocation of stocks and cash, and your age and risk profile. “We would advise using taxable funds to cover any shortfalls in advance of dipping into your retirement accounts, given the tax-advantaged nature of your retirement assets,” Karger says.
He has one caveat: “We would suggest beginning to nibble at some longer duration bonds, perhaps Treasurys,” he adds. “While short-dated bonds and money-market funds are offering compelling yields, and in many cases, higher yields than longer duration bonds due to the inversion of the yield curve, this may prove to be a shorter-term phenomenon,” Karger adds.
As most of your wealth is in retirement accounts, which means that distributions will be taxed as they are withdrawn. “This diminishes the after-tax funds available and necessitates a thoughtful distribution strategy to minimize the amount of taxes paid each year,” says Michele Martin, president at wealth-management company Prosperity in Minneapolis, Minn.
Increasing your amount of fixed-income investments — your stock and bond allocation —will create a “smoother ride” over time, she says. Martin suggests creating a more diversified allocation to bonds and fixed-income investments. “If interest rates decline, the return on cash will decline in lock step and that is defined as reinvestment risk,” she adds.
“Distribution mode is the opposite of dollar-cost averaging,” Martin says. “When you take distributions from your portfolio in down markets the impact is magnified. A more conservative portfolio that creates recurring income actually provides a similar return overall to a more aggressive portfolio because it moderates the drawdown in volatile market conditions.”
In other words, you have mastered the “accumulation” part of your retirement plan, and now it’s time to focus on the “distribution” strategy. Bottom line: Martin says a high-level asset allocation of 60/40 is adequately diversified given your age, and it may not be necessary to reduce the amount of exposure to stocks if you are comfortable with the variability of investment returns.
How will the current stock-market ‘bubble’ end?
About that potential stock-market bust. Only stock-market columnists, economists, analysts and psychics should make predictions and I don’t give odds based on any of the aforementioned parties. These predictions compiled by State Street Associates, based on research by Harvard University professor Robin Greenwood, rate such an outcome as low.
MarketWatch columnist Mark Hubert predicts the current stock-market bubble will end with slow deflation rather than a bang. He does not foresee a so-called crash — defined by some economists as a 40% fall in prices over the next two years. He recently wrote about the “huge return differential” between the cap-weighted S&P 500 SPX and the equal-weight version.
“So far this year the cap-weighted index (the one quoted in the financial press every day) has outperformed the equal-weight version by more than 10 percentage points,” he adds. “Last year, the cap-weighted version’s outperformance was more than 12 percentage points.” (The equal-weight version gives each company the same weight, regardless of its size.)
“This difference suggests that the cap-weighted version’s performance has become increasingly reliant on the largest stocks in the index, and many analysts believe such concentration is a sign of an unhealthy market that is especially vulnerable to a decline,” Hubert adds. “But my analysis of data since 1970 does not support this.” He errs on the side of a whimper rather than a crash.
So enjoy these halcyon years — and send us all a postcard.
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