What should I do with an IRA that is currently in cash?
I rolled over a 401(k) into an IRA at the end of 2015. Money was put into cash at time of rollover. With the significant losses in the stock and bond markets so far in 2016, I have been reluctant to get the money invested and have just let the money sit in cash. I haven't lost any money, but I need to get this money working for me and provide income. I am recently retired and need income from my investments. Unclear to me how to proceed - I have contacted several capital investment firms who have provided me with sample portfolios - mostly a mix of dividend stocks, a variety of bonds, REITs,etc, with varying degrees of risk. Should I dive in or keep in cash until market direction becomes a little clearer?
First, I'd like to congratulate you on your retirement! This is an exciting next chapter in your life. You have brought up a very good point and question. The recent fluctuations in the overall market have caused many investors to ask themselves the question of, “what should we do now?”. In order to provide the best possible answer to your question, it is imperative to begin by analyzing your overall investment strategy by reviewing what you are looking to accomplish now and in the future. Next, it is important to look at your appetite for risk, investment time horizon, and any liquidity needs.
I understand you are looking for income from your investments. From an investment and time value of money perspective, it would behoove you to have your money start working for you. We tell our clients that if they have short term needs, cash is essential to have on hand. Over the long run, cash will not outpace inflation. It is also important to note that your savings and investments must last you throughout your entire years in retirement.
I suggest beginning your investing schedule by utilizing a dollar cost averaging strategy. The focal point of this strategy is to invest a fixed dollar amount at specified intervals, therefore you are not timing the market. It is extremely difficult to time the entrance, exit, and re-entrance of investing in the stock market. This strategy takes out the emotions of timing the market. Over time, you will buy more shares when prices are low and less when prices are higher. This reduces the risk of investing a large sum of money into the market at a given potentially wrong time.
Market volatility, retirement and investment strategy questions are great topics to review with an independent wealth advisor/planner. After you go through these next steps, your advisor will be able to help you navigate these next steps in your life.
Great question, thank you for asking and sharing your situation.
Every person financial situation and needs is different. Although you need income, it is important to consider your entire financial situation in a comprehensive manner. Investing, especially for retirement, should be thought out through a process to figure out what strategies are appropriate for your particular needs.
The markets have definitely been volatile for the last year and a half to two years, thus people are not getting paid for taking unnecessary risk. I would encourage you to speak with a CFP professional that can help you assess your entire financial situation, and then help you put a plan together based upon your needs.
Please consider me a resource should you have any additional questions.
Hello. Without knowing important details such as your age, marital status, sources of income, income need from portfolio, investment history, etc., it is difficult to give specific, meaningful suggestions. However, the following pieces of advice may be helpful.
- Investment Income is hard to come by. 20 years ago, the retirement planning model centered around building a portfolio of income producing bonds for income with a portion of the portfolio allocated to stocks for future growth and later conversion to more bonds. Today interest rates remain near historic lows. Cash pays close to nothing. Classic retiree income producing staples such as CDs, municipal bonds, and treasuries pay only nominally more. What’s more historically safe bond funds have little room to appreciate from falling interest rates and may now face principle risk if interest rates do eventually creep up.
- In response to the low rate environment many investor have been turning to higher yielding stocks for income. While this can be an effective strategy, particularly if the stock dividends increase over time, investors who head down this path must accept the greater volatility that comes with the turf. For more on this, see the following links.
On the Hunt for Rising Dividends (Bloomberg)
The Biggest Dividends Aren’t Necessarily the Best (NY Times)
Stocks That Pay Rising Dividends (Kiplinger’s)
Not enough income to retire? Dividends can help (USA Today)
- The two greatest risks to your retirement security are sequence of returns risk and longevity risk. Sequence of returns risk is the risk of sharp market returns early in retirement. This is undoubtedly the fear expressed in your question. Fortunately, there are two solutions to this problem – (1) Don’t put all of your retirement savings in stocks, and (2) Don’t sell stocks when they are down. For more on this, see the following article I wrote for Investopedia last week:
How to Make Your Nest Egg Last Longer? Don’t Sell Stocks When They are Down! (Investopedia)
- By keeping all of your rollover money in cash, you are effectively engaging in market timing. What you are saying is that you are pretty sure the stock market is going to decline sharply, and that you are going to wait for a time when it is safer to invest. Unfortunately, this is a fool’s gambit. There is a mountain of research to suggest that this approach hinders investor returns. Having been a financial advisor for almost 30 years, I can tell you, there is NEVER a time when the market direction is clear. As an example, when the stock market hit its nadir in March 2009, most investors thought it was headed far lower. Many investors did not feel comfortable coming back into the market until it had risen 30% or more from that low. See also:
Don't Make the Trading Gods Laugh (Bloomberg)
Why Market-Timers Go Nuts (Advisor Perspectives)
You are your portfolio’s worst enemy (MarketWatch)
- Use dollar cost averaging to reduce the possibility of “Buyer’s Remorse.” While some researchers have suggested that dollar cost averaging does not help and may slightly hinder long term performance, there is little debate over its value as a psychological tool for helping investors cope with market volatility. If you believe that you need to have diversified stock market exposure to help your portfolio keep pace with the cost of living over a potential decades long retirement horizon, one way to address your fear of market conditions may be to wade back into the water slowly over time. Under this approach you may actually adopt the mind set of hoping for near term market declines so that you may have an opportunity to “buy low”.
- What you may have been taught about retirement spending is wrong. Many retirees have been lead to believe that their retirement portfolios should become more conservative over time and that they should spend down the riskier stock portion of their portfolios first or, at the very least, spend proportionately from each asset class and re-balance each year. A grown body of research now suggests that such an approach actually hinders sustainability and provides greater exposure to sequence of returns risk. Conversely, a strategy of either spending down the cash an bond portion of the portfolio first or a more dynamic approach that involves certain “guardrails,” such as not selling stocks when they are down, may significantly enhance portfolio longevity. This concept is explored in greater detail in the following article from my blog –
The Most Underrated Factor in Retirement Income Sustainability
- Asset allocation is also a key to successful retirement income planning. If you have enough of your portfolio allocated to investments that are not exposed to market risk, you may be able to withdraw from your portfolio for many years without having to worry about market fluctuations. Many planners suggest an initial retirement allocation of 70:30 to 60:40 Stocks:Bonds/cash, but individual circumstances may make alternative allocations appropriate too.
I hope these general tips are helpful. If you would like to test how different factors that you can control (i.e., asset allocation, withdrawal amount, investment expenses, withdrawal strategy,etc.) may impact your portfolio’s sustainability, you may wish to check out the free consumer version of Nest Egg Guru’s Retirement Spending Calculator.
Best wishes for a long, happy, health retirement!
First, I think you’ve made the right decision to request professional guidance to build your portfolio. If you’re having trouble deciding which firm to work with, remember to consider whether or not the investment firms have taken enough time to truly understand you in every respect that relates to your financial security. A portfolio is only ever truly well-designed if it properly aligns with your needs, risk tolerance, time horizon, etc. For example, someone later in life might have a less risky allocation than someone just starting to plan for retirement.
I think your concerns about “diving in” to the market are warranted, but you need to remember the inherent risks of waiting on the sidelines. It’s logical to want to enter the market at its lowest (and cheapest) point and to ride the market to its highest (and most profitable) point. However, trying to properly time the market is a loser’s game. You mentioned that you’re considering waiting until market direction becomes a little clearer. Consider this: Market direction is never—and should never be considered to be—clear. In reality, no one can consistently predict what’s to come, or when, or how markets will decide to react at that moment. Investors on the sidelines will very often miss upward corrections, only to pay a premium at the top of the market when greed sets in.
Rather than worrying about timing an entry point, try to consider your position as an opportunity. For almost seven years following one of our history’s worst financial crises, markets skyrocketed. More recently, prices have fallen, which means you can suddenly buy into a market at lower prices we haven’t seen in some time. Remember, buying in now could still mean your portfolio could face significant volatility, but sticking to a proper plan through the long term has historically proven its worth. Investors with a long-term approach presume the inevitability of uncertainty from market changes like we’ve seen recently. Before making any decisions, we strongly suggest speaking with a financial advisor that can build a properly diversified portfolio that reflects your needs.
I would certainly not dive into the markets until the waters have calmed and that might be awhile. Right now cash is King! It is in my opinion that we are now in the beginnings of a new bear market and if that is true, then going long or buying stocks will only mean that your stock portfolio will decrease in value while the bear market continues to push stock prices down. It is challenging to know what kind of portfolio you will need to accomplish your goal of providing income without the particulars as to age, risk, amount of money you have to invest and how much you will need each month for income. But, I will tell you this, when it comes to income seek to find some guaranteed income if possible. As an example, pension plans, Social Security and Annuities. Those are the only financial vehicles I know of that will guarantee your income. You want to be able to sleep at night. I view stocks as maybe income, you can't count on stocks for guaranteed income. Many companies are currently cutting dividends which will effect potential income. The fact is, is that stocks are primarily for long term growth. If you use bonds for income, stick with highly rated individual bonds with a strong company. As for REITS, well I think that is enough for today. I would recommend you stay out of the waters until you find a financial captain who understands the seas and can keep you in a financial vessel that will help you stay afloat. I hope the very best for you. Safe sailing!