Should we sell our investments and move our money into cash accounts?
My spouse and I are 70 years old and retired. We have $800,000 in investments in our 401(k)s. After we receive Social Security benefits, we need to take approximately $30,000 per year out of our 401(k)s. We are very concerned about the volatile market. Would it be wise to sell our investments and move the money into cash accounts?
I am not a fan of letting market volatility dictate you going to cash as it is almost always a bad decision. The market timing game is a fickle monster and I don't recommend playing it. Rather I think your best bet is to address your asset allocation. I would work with someone to help you figure out the needs in more detail and the amount of dollars you should allocate to less volatile asset classes like bonds. This is something we talk to all our retired clients about as this will structure your assets not to have to react to markets and provide you the comfort and piece of mind that your dollars will be there when you need it. There is a good chance you both live into your 90's and I'd hate for you to not experience the growth potential of stocks on some of your dollars to help combat inflation. Happy to answer anything else or help in any way necessary.
If you are simply buying and holding without any type of sell discipline to control drawdown risk, then moving a certain amount to cash might be prudent for you if it is scaring you too much. Some things are not all about money, but quality of life. So you could move all to cash or say, 50% with the remainder in the markets, or you could institute a strict sell discipline for all of your positions.
Be wary though because there are "indexed" annuity salesmen that will feed upon your fears promising you "most of the upside with none of the downside." While it is true you won't get any of the downside, you won't get "most" of the upside either, and will likely get around 3% to 3.5% over time. But you are locking in your money for years.
So with the 50-50 approach, you could ladder some CDs between 4mo to 18mo depending upon each months yield for emotional well-being. Normally the discount brokerage firms get their inventory Monday afternoon or Tuesday morning depending upon the brokerage house. If you wait later in the week, they will have already been picked over and you are better off waiting until early the following week. You will make around 1.6%+ if done properly but you won't lose. There are even FDIC insured CDs that guarantee the principal but the interest crediting is linked to an equity index like the S&P but with a cap. This is very similar to an indexed annuity but with no big surrender penalties, upfront hefty commissions, or salesmen. They are primarily for the fee based side of management but you need to shop & compare them. And you would spread these out over 2 year, 3 year, and 5 year. This way if the market goes up in the first two or even 3 years, but then goes down hard, you will make money on the first 2 and simply get you money back on the 5 year. Conversely, if the market has a major correction early but then recovers, you get your money back on the 2 year, possible make money on the 3 year, and make money on the 5 year. You could mix these various CDs with half of the money so that at the very least, you know that you will get your $400k plus some nominal interest. Then with the other half, you could have a fairly conservative equity portfolio.
The other option is to have your portfolio actively managed by someone who employs a sell discipline thus limiting drawdowns. They move a portion to cash, hedge, or a combination thereof during market duress. You will not make quite as much as the index on the way up but have downside protection. It is called risk-adjusted returns. I believe you control risk first, and make the returns second. Most of my clients are at or near retirement and cannot afford another 2008.
Lastly, the super-cycle of dropping interest rates from 1981 is over and rates are on the rise. This means the bull market for bonds is likely over with the exception of a few short term "flights to quality" during equity market selloffs. But the risk profile of longer term bonds is significantly higher than it was just a year or two ago. So I do not subscribe to having a pie chart based upon your age & station in life and just holding on & hoping for the best because the risk profile of the assets themselves change over time. So it is more about the risks in the assets than your "risk profile" which you intuitively understand based upon your question. And with these artificially low interest rates, there is truly no such thing as "safe money" until interest rates rise and normalize, which will be years. Again, this is due to the cost of living rising faster than the interest received. I personally cannot just sit in cash & let my purchasing power whittle away for a slow, consistent loss (buying power). I will, however, use cash as a defensive position during hard selloffs.
These are the things that you must think about and are strategy questions you must answer for your family. For me though, I believe it is about strategy, not products or which funds.
On a mechanical issue, you should almost certainly roll your 401ks into IRAs for a whole plethora of reasons - lower costs, virtually unlimited investment choices, more control especially on distributions, etc.... This would be true unless you have a complete wide open, full brokerage 401k and the employer pays all or most of the costs. Most employees don't realize that they share on a pro-rata basis most of the 401k plan costs. So if you have a bigger balance than most, you are paying slightly higher costs than most, and you are retired. Therefore I would open up an IRA at a discount brokerage firm and do a Custodian to Custodian Direct Rollover. Open up the account & get your account number, then go to your 401k provider/administrator for the paperwork to initiate the transfer directly to the new custodian. If you don't do this correctly & they send a check to you to do a 60 day rollover, they will automatically withhold 20%. Then you will have to come up with the extra 20% out of pocket for a "100% rollover." The withholding will be netted against your taxes and you will likely get a big refund (of your own money). So just be sure to do a direct IRA rollover which will give you more control, lower fees, and much greater choices.
Gave you a lot to think about. Best of luck, Dan Stewart CFA®
This is a very good question that many people ask at various points in their life time, There is a short answer and a long answer.
The short answer is NO, do not sell and move all to cash.
The long answer is still NO because:
1. You and the wife will live for another 20 years, which will have periods of ups and downs, inflation, recession, bull markets and bear markets, higher interest rates and lower interest rates. Cash cannot give you returns over time that will provide the Required Minimum Distributions that you are mandated to take, plus grow for the future and increase your purchasing power over time.
2. The key to maintaining investments over the long haul is to have an asset allocation that holds both stock (can be ETF or Mutual funds) as well as fixed income (Bonds and cash) in the right proportion for your situation. I do not know what that may be. For instance: Do you own a home, is it paid for, what amount of SS income do you have, do you have a pension, are you supporting anyone else and many more?
3. What is the current percentage of stocks in your 401k? Without knowing anything about you, it is not possible for me or anyone else to tell you what is right for you, but if we were to look at the 42 different financial companies that offer target date funds the average of those 42 would suggest that 30% stocks and 70% fixed income maybe a reasonable allocation. If your current allocation is 60% or 70% it would be appropriate for you to decrease the percentage of stock but not going all to cash.
Your current RMD is about $29,000 to $30,000 but that that will go hiogher in the future. For instance an 80 year old with $800,000 would have an RMD of about $42,000 and at age 90 $72,000 RMD.
I would recommned that you talk to a CFP professional about determining the right allocation for your situation and if you should keep the funds in the 401k or move them to an IRA.
The stock market has returned to what has historically been a normal level of volatility which leads to the important issue you raise as to how much exposure to stock markets do you need to take in order to maintain your spending needs and, equally important, how much are you comfortable taking. The latter is important since what you don't want is to find that you don't have the emotional tolerance to stay the course now that we have returned to a more normal level of volatility. Since your plans are to draw $30,000 from a $800,000 portfolio, which is about 3.8%, you could have some of the portfolio invested in the stock market. Since you are only 70, you and or your spouse are likely to be drawing from this portfolio for at least a decade and quite possibly more than 20 years. That is a long time horizon during which inflation will erode the value of a low volatile portfolio of only high quality fixed income funds. Some stock market exposure would make sense to maintain given your time horison, but each of us has a different capacity and tolerance for volatility. Any shift should be gradual and one should always try to avoid the temptation of trying to time when to enter or exit stock markets.
First, you are on the right track to be concerned in this current market environment. You may hear many calling this a 'buying opportunity' for the long term but the more important question is how does it impact you and your situation? If you are losing sleep and turning on the news to see what is going on regularly, then you are right in considering cash as an option. However, the downside would be that your cash holding won't provide you the opportunity to earn a return to provide for the income need you described. All normal suggestions apply here: Diversy, have a cash runway to last 12+ months, hold some equity. You will hear that often enough. The one different thought is to segment out your entire amount into different categories that will allow you to relieve your worry and stress. How much available money should you have to help you sleep at night? How long with that last for you? What amount can you expose to the risk of a volatile market and not think about it so you can attempt to earn at least the income amount you need? My belief is you can use cash as a tool over the next 12 months - especially over the summer to come. An article I produced about this topic on investopedia may help understand what could be best in your scenario. ("Holding Cash Instead of Chasing Investment Returns" - https://www.investopedia.com/advisor-network/articles/avoid-hazards-chasing-returns-holding-cash/). Stay diligent!