February 19, 2021 – As everyone looks forward to the end of the global pandemic, it’s important for pre-retirees and the recently retired to stay focused on income guarantees and not market opportunities. This may seem strange, especially with so many wild success stories on the news, but let’s delve into it. Opportunities in the stock market following economic upheaval are actually an issue to anyone looking at the market’s continued growth to provide regular monthly income.
Starting now, several asset managers are revising their 2021 market forecasts to reflect their higher return expectations. This is largely due to a new round of stimulus and positive results from vaccinations, but it begs a question: does this lead us to what former fed chairman Alan Greenspan called “Irrational Exuberance” when referring to the meteoric rise and eventual meltdown of the dot coms in the 1990s? The answer is a resounding: YES!
The concern isn’t whether revised pricing models bear fruit for Wall Street investors or even working savers on Main Street. Honestly, let’s go two blocks up from Main Street and go to the corner of Maple and Elm. That’s where the recently retired and the pre-retirees live in modest homes and worry about looming inflation and the nagging “what if?!” should the markets crash. They’re the ones most at risk because they lack the two qualities that money managers always assume everyone has, endless amounts of time to stay invested and the ability to reinvest their dividends without ever needing to withdraw a penny to live on. These two qualities allow money managers to place those long-term bets and know that eventually they’ll be right, kind of like a broken clock getting it right if we all just wait long enough.
Bets generally have two outcomes, either you’re right or you’re wrong. If the money manager’s bets are wrong and if the economy has indeed suffered a systemic shock that an additional $1.9 trillion in stimulus won’t immediately fix, then a couple of negative years while taking income from those stock market investments can start a death spiral for retirees. Think of an apple orchard. The owner experiences a bad yield of apples on year one, so the orchard cuts a few branches to sell for firewood. Next year fewer branches mean fewer apples. If they don’t have a strong positive second or third year, the orchard has to cut more branches—even fewer apples. If that continues, it’ll find itself eventually spiraling to zero.
Here it is in practical terms. If a retiree takes a fixed payment from their stock portfolio and sees two negative years with a third that’s either still negative or the positive isn’t enough to cover the past losses, then they’re using their principal for those payments, and they’ve begun the death spiral.
How do bubbles figure in? The money manager’s positive narratives that come with these forecasts get the average investor excited. “The pandemic vaccine is going to fix everything!”, and so it’s safe to sound the all-clear. The immediate thought is “everyone back in the water” since it’s really December 2019 and we get a redo of 2020.
As Forbes recently pointed out, the pandemic has caused a 32% jump in e-commerce shopping which sounds great. But, then what happens to all the brick and mortar stores and their employees with overtime, paychecks to cash, and their own consumption habits? It’s a confusing situation that hasn’t found its legs yet and some asset managers don’t think that matters.
But on the corner of Maple and Elm Street it matters more than anyone can imagine. The ‘retirement-on-my-mind’ seniors don’t have time to recover from a bad bet. The income decision they make now will determine the trajectory of their entire lives going forward. Their standard of living, their ability to get medical care and their general sense of well being are all on the line. Do they gamble that the markets will return, and they won’t be faced with two negative years followed by a “maybe, who knows?” third?
What It Boils Down To
How does a retiree protect their nest egg? The answer is to not liquidate assets for income, but rather have a solid separate base of guaranteed income for life. Remember grandma and grandpa’s union pension, or maybe even their government pension? That solid income base allowed them to keep their investments for growth because they were not relying on them for income.
That pension can be mimicked through income annuities guaranteed by the world’s largest insurance companies. The safest approach? Think of a split strategy of guaranteed income coupled with an inflation hedging portfolio of real estate and stocks.
About the Author
Dan Harutunian CFP® specializes in income planning and holds a Certified Financial Planner designation. He earned his Economics degree from California State University, Northridge and is currently completing his Masters In Jurisprudence at Texas A&M Law School. Dan has authored numerous articles on financial planning and was a regular co-host on the radio program “Don’t Invest and Forget”. He spoken to groups far and wide about prioritizing income when planning retirement.