Nearing retirement? Check your buckets.
My dad recently retired from his lifelong career in higher education. Over the course of that career he worked hard to both provide for his family and to save diligently for the future, ending up with a sizable nest egg in his 403(b). But lately, with the stock market struggling this year, he’s been understandably stressed to see the value of his account decline over the last several months, especially after the record gains he saw in 2017.
In trying to explain to him why he shouldn’t panic, I realized that a lot of the arguments for staying the course in a down market resonate better with a younger audience than someone like my dad who’s already near or at retirement. “I don’t have years to wait for the market to rebound,” he told me. “Your mother and I are already drawing down from that account.” This anxiety is completely understandable, but it’s founded on a couple of false premises. When most people hit retirement they don’t withdraw their entire account at once, but rather slowly over time. Thus, the idea that you don’t still have years left for the account to grow is not necessarily correct.
Two Retirement Buckets
One way to conceptualize this is to think of your retirement account as being held in two completely separate buckets. If you’re a blooom client at or near retirement, these buckets are likely relatively equal in size (though one may be slightly larger or smaller based on your risk tolerance).
1: The Stable Bucket
The first bucket is the money that you are actually drawing down from. It’s held almost entirely in cash equivalent positions and more stable income funds, such as bonds. This bucket likely won’t grow very much, but it also won’t fall considerably either. It’s your income generating bucket. In a prolonged stock market decline, you can be relatively comfortable knowing that this bucket will help preserve enough of your nest egg to provide multiple years of income while you wait for the market to rebound.
2: The Volatile Bucket
The second bucket is still being held largely in equities, which are likewise still susceptible to big market swings. This is the bucket that likely makes you nervous when you see your account value decline, but remember: you’re not drawing down from this bucket! In truth, you need that volatility in this portion of the account, because it also brings with it historically much higher growth than your income generating bucket. If you’re hoping for your retirement to last 20+ years, continued growth is key.
When you hope to retire in six months and see your account value decline, it’s easy to worry like my dad that you “don’t have time” to wait out the market. But instead of thinking you only have six months, think instead about how many years you hope to spend in retirement. That is how long you truly have to still ride out the ups and downs of the market, while your income generating funds are more safely sheltered from any storms that might be brewing.
So if you’re in the same boat as my dad and find yourself frantically checking your account balance weekly or even daily, just remember that with an appropriately diversified portfolio time is still on your side, even after you’ve hit the promised land of retirement!
Written by Laura Cerveny, blooom’s Director of Learning and Development