How Much “Safe Money” Should Be In Your Portfolio?
Many retirees understand they should be protecting a portion of their retirement nest-egg from losses due to market volatility. But what other factors exist that can cause your account value to drop and how much should you convert into “Safe Money”?
A market downturn is one of the first things most people fear when it comes to their retirement savings, and for good reason. We all remember 2008-09 and the devastating effects it had on many people’s retirement plans. I have multiple clients that have told me they lost about half of their retirement savings during those two years, and many still haven’t recovered. But simply losing portfolio value isn’t the only concern here. There are three major challenges that stack on top of a down market for concern.
First is the market math. Most people think that if they experience a 30% loss, they will experience a 30% gain and recover those losses, but that’s not how the market works. Let’s assume you have $100,000 and lose 30%. Simple math, right? That means you’re now down to $70,000. Now let’s assume the market goes back up 30%. 30% of $70,000 is $21,000. $21,000 added to $70,000 is only $91,000. It would actually take a 43% gain to get back a 30% loss, and these numbers go up exponentially! This alone is why many never recover from a major market collapse and are looking for “Safe Money” options.
Second, are the fees you pay for the management of your account. The average fees most people pay is between 1-2% annually, which can add up to almost ⅓ of your account value throughout your retirement, but some pay much more. I have personally seen retirees that are paying close to 4% annually, and they didn’t even realize it. And these fees keep coming out every year, even if you are experiencing losses. Did you know there are products available that have no fees, ever? That’s like getting a bonus on your money every year by just not paying those fees.
And third is the effect of having to take withdrawals while the market is down. If you are relying on your stock market account to fund your retirement, and the market drops, then you will have to sell more shares to get the same amount of income from the sale of those shares. In other words, as the market drops, you have to liquidate more of your account to get the same amount of revenue. This would force you to adjust your income level down significantly in order to keep your account value high enough to cover your longevity risk. This can quickly create the dreaded retirement death spiral where the market is dropping while you are taking an income, and your account may very well never recover.
So what can you do to counter these challenges, and how much should you protect?
You need to be aware that there are retirement products available that guarantee no losses ever due to a market drop but still allow you to receive market-like returns when the market is up. These products can lock in your gains periodically, so you never have to worry about losses, and many of them have no fees at all. Others can provide a guaranteed lifetime income you can never outlive and will never decrease. These “Safe Money” annuity plans allow you to be prepared for whatever may come without having to hope the market cooperates with you.
So how much should you have in one of these “Safe Money” plans? Most experts agree that a percentage of your retirement money that is approximately equal to your age is a smart idea. For example, if you’re 70 years old, having a smart amount in a “Safe Money” account is about 70% of your total assets. Obviously, this is just a general rule of thumb, but it is a good reference point.
Converting your age to a percentage and having that amount protected from market volatility can help to ensure your golden years will be stress-free. Helping you sleep at night, knowing your future is protected from an overnight event on the other side of the world that would affect your retirement fund.
So what should you do now to help ensure your retirement against the next market collapse? Talk to a Certified Financial Fiduciary® that will help you find the best way to protect your nest-egg from whatever the market may do. They will help you customize a plan for your specific situation. Then sleep easy knowing a portion of your savings is protected, safe and ready to work for you for the rest of your life.