Charlie Eissa is a financial specialist and retirement savings guru. In the following article, Charlie Eissa discusses reasons to rethink the traditional retirement plan for a safer option in such a volatile market.
In the last year to date, the Dow Jones Industrial Average has dropped more than 6%, with major retirement shares absorbing an even greater 15% loss. Yet, in a system that has long told workers to put 60% of their savings into stocks and the remaining 40% into bonds, many are now questioning whether current retirement plans can weather continued, prolonged financial downturns.
On the whole, though, Charlie Eissa explains that market analysts advise against reshaping standing retirement plans, especially if investors are still many years out from retirement. The only reason to consider otherwise is if an investor is about to start drawing their retirement savings.
The 60/40 Rule
The long-term stability of the stock market has been one of the most enduring tenets of retirement planning. Even when the market suffers sharp declines, as it did in 2001 and 2008, it has always rebounded and gone on to new highs explains Charlie Eissa.
The following years have shown that, for the most part, stocks are a good investment for the long term. In the short term, however, stocks are much more volatile, which is why investors are often advised to have a mix of stocks and bonds in their portfolios.
Charlie Eissa explains that this mix is often referred to as the 60/40 rule, which means that 60% of an investor’s portfolio is in stocks and the remaining 40% is in bonds. The 60/40 rule is a guideline that has been around for almost a century and was first introduced by economist Harry Markowitz in his 1952 Modern Portfolio Theory.
Markowitz argued that a portfolio should be split 60/40 between stocks and bonds, with the stocks providing the growth and the bonds providing stability. Charlie Eissa says that this mix has since become standardized and, over the past couple of generations, the 60/40 portfolio has earned an average annual return of 8.8%.
In comparison, a portfolio comprised of 100% stocks has earned an average annual return of 10.4%, while a portfolio that is 100% bonds has earned an average annual return of 5.5%. So, while 100% of stock-based portfolios have earned more on average, they’ve also been more volatile explains Charlie Eissa. For example, in 2008, the stock market lost 37%, while the bond market gained 6%, wiping out many people’s retirements.
When Investors Should Consider Adjusting Their Plans
Given the current state of the economy, Charlie Eissa says that some financial advisors are suggesting that retirees and those nearing retirement should consider readjusting their portfolios to be more conservative. Rather than sticking with volatile stocks that are currently in free fall, it may be financially wiser to hold retirement savings in high-interest savings accounts where the money will benefit from the Fed’s recent decisions to hike interest rates.
By having liquid access to their funds, retirees will not have to worry about losing their life savings should the stock market continue to decline, and, best of all, as inflation returns to normal levels, the money in their accounts will increase in value. For the time being, though, it may be best to start paying down existing debts.
Safer Investment Options for Upcoming Retirees
Charlie Eissa says that it may be time for aging employees to consider how they’ll make their savings last in spite of high inflation and a downturn in the market. One option is to invest in an annuity, which is a product that pays out a fixed income for life. Annuities can be a good option for those who are risk-averse and want to ensure that they will have a fixed income in retirement.
Another option for those who are looking to preserve their retirement savings is to invest in a life insurance policy. Whole life insurance policies accumulate cash value over time, which can be accessed through policy loans. Charlie Eissa says that the advantage of this option is that the money can be used for anything, including retirement income.
The Bottom Line
Anyone who is still years away from retirement should avoid making radical changes to their retirement plan. The best course of action is to stay the course and continue saving as much as possible. For those who are closer to retirement, though, it may be financially wiser to seek professional guidance from a licensed financial planner.
