There's a plot of land sitting in
North Carolina waiting for Robin Festa and her husband to build their
retirement home.
She's hoping to retire early in
three years at age 63 and head south from Connecticut to enjoy a lower cost of
living. The pair have been dutifully socking away as much money as they can
into their retirement accounts.
She's meticulous about their
savings, tracking everything on a spreadsheet and checking the balances
frequently — a task that has been enjoyable for the last few years as the
market climbed to record highs.
But the stock market's recent
volatility has made checking her balance a lot less fun. In one week in early
February, they lost $30,000.
"I have to admit a tear slid
from my eye," she said, referring to her balance after the Dow's
worst week in two years. They were down $18,000 for February.
The couple are planning to use
some of their retirement funds to build their home down South and Wall Street's
recent performance has been tough on then nerves. "When things swing
wildly, it upsets the apple cart," said Festa, who is a legal assistant.
Wall Street's recent dips bring
back some painful memories: in 2008, they lost about $50,000 from their
retirement savings. At the time, that was a significant portion of their funds.
She worries it will be harder to recover another big loss so close to
retirement. Her current portfolio is 60% invested in stocks and 40% in bonds.
"It's impossible to try and
time the market," she said. "It's a crap shoot. To sit there and
watch your money disintegrate is hard, but if you take it out and it goes up,
that's not good either. It's hard." She hasn't made any changes yet to her
investment strategy.
Sitting tight when Wall Street is
gyrating is difficult, but financial advisers warn against making
knee-jerk investment decisions.
"I jokingly say they should
pass a law that no one can look at their portfolio," said Jim Saulnier, a
certified financial planner in Fort Collins, Colorado. "People use short
term information to make long-term decisions, and that is bad."
But now is a good time to
evaluate your asset allocation. You might have intended to be 60/40 stocks and
bonds, but Wall Street's run-up could have tilted the favor more toward stocks,
noted Marguerita Cheng, a certified financial planner in Gaithersburg,
Maryland.
"The equities markets have
been outperforming the bonds, overtime they grow more, so what was 60/40 might
be closer to 70/30," she said. "Don't set and forget."
The general rule of thumb is the
closer you are to retirement, the more you favor bonds over equities. For folks
five years away from retirement, T. Eric Reich, a CFP in New Jersey,
recommended having about 70-80% in stocks. If leaving the workforce for good is
still a decade or more away, he suggested being fully invested in equities.
One way to help stomach the
swings is to use dollar cost averaging, Cheng said. This strategy
means you buy a pre-determined number of shares on a set schedule — regardless
of market fluctuations. By investing your money gradually, it can offer
some protection from market dips.
Having enough cash on hand to
avoid withdrawing funds during market dips can also be reassuring to people in
or close to retirement, according to Reich. That means if you are three years
away from retirement, keep one year of expenses out of the market and then
increase that for every year closer to retirement you get, he explained.
"We've never had more than
16 consecutive quarters of negative returns," he said. "If the market
crashes the day you retire, you don't need to touch that money and can live off
the cash, then in positive years I can start to replenish the three-year
buffer."
Grouping your retirement savings
into different buckets and investing them accordingly can also bring peace of
mind and manage risk during a market freakout, explained Saulnier.
The first bucket is the cash you
will need for the first two years of retirement not including any other
sources of income, like a part-time job, pension or Social Security in cash.
Then divide up the rest of your
retirement savings into time periods of retirement. The more time you have
before you need the money, the more aggressive your investment strategy,
suggested Saulnier.
"The money you are going to
need to spend in the first five, 10 years of retirement that needs to be put in
low volatile conservative holdings, but the money for 70, 75 and 85-year-old
you to spend that can still be fully invested."
For Festa, she is keeping a close
eye on Wall Street and her retirement savings. She said if she were to lose around
$100,000 she would likely take a breather from the market to preserve what they
have.
"I don't want to, but I
could always continue to work if we had to," she said.