What is the best way to lock in current market gains, while also beating inflation rates?
With the market at an all time high, what is the best way to lock in some gains, while also keeping sufficient funds in stocks to beat inflation rates? We have 58% of our portfolio in stocks. We plan to retire next year and expect to draw 3-4% from our 401(k), in addition to our Social Security. This will account for about 70% of our pre-retirement income, which is sufficient for our lifestyle.
Good question, but I would suggest it's a fear based question. It's not a question of "if" stocks will have a pull-back, it's "when". Investing in diversified portfolios of stocks can be a great long term strategy, and can continue to be in this case for you as you enter retirement. The question is, does it really matter to you if and when the market pulls back. For example, if you have 42% of your portfolio in bonds and can live off 3-4% withdrawal from this amount, who cares if the stock portion of your portfolio has a two year decline? You could simply take your withdrawals from the cash and/or bond portion of your portfolio while you wait for the stocks to recover. The only issue is that you might not "feel" good in the 1-2 years when the market was down because you remember how high your balance was. But, to your point, you aren't liquidating your balance anytime soon - only at a 3-4% rate over time, so you can easily weather the short term fluctuations of your stock portfolio.
If you were my clients, I would probably recommend that you allocate slightly more to stocks unless that would make you completely panic. The point is, stocks are great long term investments IF you can emotionally handle the interim volatility that will always happen in that market AND you have enough money so you don't HAVE TO withdraw when the stock market is down. Big emergency fund and appropriate allocation to bonds/defensive is good. All the general rules of thumb are overly simplistic and it depends on the person.
Hope that helps and have a great Christmas and holiday season!
I could launch into another denunciation of market-timing -- after all, markets rise by making all time highs every other day and you can never know when it will stop or how much the opportunity cost might be for dropping out today -- but I'll spare you since I think your question is more related to producing income that retains your long term purchasing power.
Keep the 58% in stocks. If you are one year from retirement and your total living needs are about 5% of your invested assets, then you are in good shape and should consider at least 2/3 of your nest egg to be a long term investment (and thus appropriate to be invested in equities). If we get a market downturn, look on it as a buying opportunity and add to your stocks; but I hear you that it's probably not the best time to be doing that right now.
I use preferred stocks for retirees that need "fixed income." Preferreds pay a set dividend, trade at a par value (usually $25), have a call provision, and fluctuate with interest rate moves. Most are listed NYSE. They seem to correlate more or less to long term corporate bonds, but on the whole pay a higher yield. They do not fluctuate in correlation with the common stock market. Our client portfolio has a current yield of roughly 7% (slightly less yield-to-call, though). If you also have invested savings apart from your pension assets, you can hold preferreds and get dividends that are qualified for tax purposes -- another big advantage over bonds. Feel free to contact me if you have any further questions.
Some advisors will recommend an annuity to "lock in gains" or issues "guaranteed income". However, beware of high sales commissions and capped returns that may not even keep up with inflation. A better option may be a conservative to moderate ETF portfolio. Learn more about ETFs here.
Well, it seems like you have a secure strategy put in place, however, you might want to make a few changes to adjust to retirement while achieving your goals. For one, you should probably change up your investments to a mix of non-correlated alternative investments. This way you avoid the volatility of the stock market, as well as other markets, such as energy and real estate, while at the same time generating higher yields than bonds. Another thing you can do is be a proactive manager rather a passive buy and hold manager. The most important thing to keep in mind is that you want to make sure that you don’t just maintain your lifestyle, but also that you are prepared for emergencies, car trouble, leaky roofs and inflation still exist in retirement. This is why it’s best to maintain control over your retirement fund rather than simply focusing on growth. Many alternative investments are perfect for this, such as a real estate investment trust or land banking. These investments allow you to get a predictable return while having an investment that is not correlated with the stock market. I hope this was helpful in your effort to Plan Smarter and Live Better.
Since commodities are likely to outperform in 2018, one suggestion is to sell some of your U.S. stocks and to use the money to invest in mining and energy funds including gold mining shares, natural gas explorers, oil drillers, perhaps some renewable energy companies, and TIPS for more conservative growth. Keep some money in cash since U.S. equities are likely to suffer their third bear market since 2000. A year from now you should probably become even more conservative since eventually we will suffer a global recession.