I am not a big fan of trying to make predictions. That’s why my company has always believed in making solid plans that will last in almost any market condition.
That being said, our country has entered a state of emergency and we are seeing events that are unprecedented in our lifetime. While these precautions are necessary because they will most likely save lives, we believe that there is a good chance they will cause continued economic and market volatility.
Schools, parks, events, hotels, restaurants, etc. are shutting down and/or seeing reduced business. Because of this, we anticipate earnings to decrease for an extended time and the market to continue to be volatile.
Here are 3 precautions you may want to take into consideration with your retirement funds:
1. All Time Low-Interest Rates
If you are in Fixed or Fixed-Index accounts, your principal is protected from market loss, but interest rates are dropping significantly to try to encourage borrowing. Low-interest rates are fantastic for the economy and people borrowing, but they’re terrible for conservative investors and fixed investments.
Our recommendation is that if you have any Fixed or Fixed-Index accounts coming due within the next year or two OR you have money you were planning on putting into Fixed or Fixed-Index accounts, now is the time to look at your options, as there are still some accounts that have not adjusted to the current interest rate drop.
2. Moving to More Secure Accounts
If you have money in the market, you’re likely seeing a drastic reduction from the highs earlier this year. Some of you may be thinking about moving money to safer options, and while we never recommend selling low — the problem is that we don’t know where the bottom is. If you’ve been in the market for over 5 years, you may still have significant gains that you can lock-in.
If you are thinking about making a change from the market to safer investments, we recommend going with investments that have a level of protection but will still let you participate in some of the market gains in case things turn around sooner than later.
Here are two options to reduce risk but still participate in market gains:
- Fixed-Index Annuities – These are deferred annuities that will protect your principal if the market index goes down but will let you participate if the market goes up. These will limit your upside potential as well. Some have income riders that can give you monthly income for life.
- Managed Portfolios – Timing the market is almost impossible. It’s hard for us to see the trends and behaviors that will be coming in the future. if you’re convinced that the market will continue to have volatility, but you don’t want to get out, you may want to consider looking at a managed fund portfolio. These funds are by no means a guarantee, but they may be able to reduce some of the unwanted volatility, while still being invested in it.
Note: The downfall of Fixed-Indexed Annuities is they have a time commitment and limited liquidity (usually 10% free out, with a time commitment).
3. Income/RMDs From Market-Based Accounts
If you are currently taking income or RMDs from market-based accounts, you may want to consider taking those distributions your fixed accounts instead. RMDs are based on the previous year’s value.
So, let’s say that you have a 5% RMD and you have to take a distribution from an IRA that was $100,000 December 31st. That means your RMD is $5,000 this year no matter what your account balance is when you take the money out. If your account is worth $80,000 when you take out your RMD, that means you’re now taking an RMD amount of 6.25% instead of the previous 5%.
The example above is one reason that we always recommend having a fixed account in your retirement portfolio. If you have a fixed account, you can take the RMD out of there (assuming they’re the same tax code) and then you would be taking out 5% because your account didn’t decrease. In other words, you wouldn’t have to sell low.
With all of that being said, we do think we will get through this and everything will eventually be back to normal, but just like we are all doing with COVID-19, safety and precautions must be taken.
We are hearing that some people aren’t hearing from their advisors. We are here to help. It may be time to make adjustments and take precautions. If you’d like to talk with me or someone on our team feel free to schedule a complimentary appointment here.
Did you know we are set up to work with you 100% virtually? Even if you’re not techy, it’s very easy to work with us either over the phone or over webcast. All paperwork can be E-Signed or Mailed.
Steven Wise, President