Boomers – How Will the Next Recession Be Different?

Written by Tami Acree

This is Part Two of the article Millennial Maiden Voyage, which was directed primarily toward young professionals born in the late ‘80’s and ‘90’s. Millennials who entered the workforce and started investing since the Great Recession in 2008 have yet to personally experience a substantial market downturn. This past February (2018) we saw a return of volatility in the equity markets and experienced our first correction in a while (a correction is classified as a 10% decline), though it was short-lived. When the next severe and lingering downturn comes, these Millennials will be faced with new financial tests and emotions that may never have come up in the past. But there is another group of individuals and couples who will experience the next equity market recession differently than ever before. I refer to those of the Baby Boomer generation who have retired in the nine years following the Great Recession.

If you retired in the past few years, you have had (relatively) smooth sailing! It’s easier to withdraw from a portfolio that has increased double digits than to pull your living expenses from a portfolio experiencing negative returns. Understandably, a host of new challenges may accompany you down the next recession trail.

You are certainly not alone as you face these challenges. Sen. Rob Portman (R-Ohio) was quoted several years ago stating that approximately 10,000 baby boomers retire each day. The Washington Post provided the math behind this figure in an article by Glenn Kessler. If we assume these numbers, we conclude that nearly 33 million people have moved from the accumulation to the distribution phase of their lives since 2009.

Navigating Market Corrections as a Baby Boomer

If you are one of these 33 million and have been invested for any part of your working life, you have survived several market downturns and lived to tell the tale. During those times, you may have been reassured because you were still accumulating, still saving, still contributing to your accounts from cash flow. A market correction meant the stocks and bonds you were purchasing with your retirement plan and IRA contributions were on sale! You were able to obtain more shares for your money. And your portfolio still had time to recover before you needed it to be there for you. Now that you are living on your money, you may need to adjust your thinking in order to Sleep Well At Night despite market volatility.

Investment Tips for Baby Boomers in a Down Market

The same four tips of advice apply to you, the Retiree, as to the Young Professional, but for a variety of different reasons. These recommendations are for the career person who has worked hard for many years and feels uncertain about how to invest now that he/she is financially independent. They are for the spouse who hasn’t earned a salary but has spent a lifetime managing a home by depending on the paycheck of a faithful partner, who has now retired and stopped receiving that paycheck. They are for anyone looking to strongly weather an equity market correction in their retirement season. If the statements above resonate with you, pay attention to these four tips.

1. Hire a coach. The white paper released in September 2016 by one of the world’s largest investment companies took its survey data from young and experienced investor alike and concluded that hiring an advisor can add approximately 1.5% to your return by providing behavioral coaching. While coaching is important for those early in the race to start them off on solid footing, it is crucial for those nearing the finish line. Unwise decisions can have a more detrimental effect in the second half when there isn’t as much time and opportunity to recover. A fee-only advisor acting as a fiduciary can help take the emotion out of financial decisions. Fear and greed operate differently on a person depending on his/her situation in life. A coach prevents you from taking debilitating detours in all stages of life; detours like going to cash at the wrong time, purchasing a high priced annuity when it isn’t in your best interest or failing to make the most of a tax advantageous situation.
2. Strategically determine your asset allocation. You may be familiar with the general rule, “Subtract your age from 100 and that should be the percentage of equity holdings in your portfolio.” That is rubbish; let that advice go in one ear and out the other. Your asset allocation should be a factor of your goals, your portfolio balance, your income and your ability to handle market volatility. Age may play a role in each of those factors, but alone it is not adequate to set your asset allocation.
   Getting your asset allocation right is especially important for retired Boomers in a bear market. If you are living on distributions from your portfolio, your bond allocation provides the stability you need in a down equity market. From the Great Depression in 1929 to present day, it has never taken longer than five years for an equity market to recover. In those recovery years, your monthly living needs can be provided by selling bonds. Bond performance is often inversely related to the performance of stocks.
3. Invest in Mutual Funds and Exchange Traded Funds. You can take on too much risk by owning individual stocks and bonds that can go to zero. You can also err on the side of safety by being persuaded to buy an annuity. So many financial advisors recommend the purchase of an annuity as a stable source of income. You’ve probably seen the commercials that feature a celebrity on a beach saying he has “guaranteed income for life” and that sounds great. There are a few rare cases when an annuity makes sense, but across the board we find most annuities to be expensive, inflexible and unsuitable investment options. You already have an annuity; it’s called Social Security and it’s backed by the Federal Government. Investing in Mutual Funds and ETFs with your portfolio will keep your assets as tangible and flexible as your needs dictate.
4. Highly diversify your portfolio. A diversified portfolio is a long-term approach to growth. Hopefully, by now you are not charmed by Get Rich Quick schemes. You have seen the value of consistent deposits over time and the effect it has had on your portfolio. Incorporating a steady, strategic and mathematical approach to rebalancing in a portfolio spread across many different investment sectors brings stability to an atmosphere full of fear-mongering news media. See Joel Bengds’ recent article: Don’t Put All Your Money in One Basket.

I hope you have had the pleasure of retiring TO an activity, endeavor, or cause, rather than just retiring FROM your career. It’s important to maintain your purpose and calling and have goals in your retirement years. Your portfolio is a tool to accomplish these purposes, not the end goal in and of itself. Your retirement years shouldn’t be categorized by worry over your money. If you find yourself uncertain about how to invest as a retiree or anxious about the next correction, try the tips above.

If you are looking for retirement or asset allocation strategies, please contact HSC Wealth Advisors.