Investing Cash Flow Risk When Retired
We all know there is a risk to investing. We never really know if the market is going up ... or down.
Most of our lives, this isn't an immediate issue for most people. They are in the market for the long term and "conventional" wisdom is that you shouldn't sell when the market is down, but rather wait until it comes back, which is invariable does.
Note: This post does not provide any specific information for individuals to use for investing. That is your responsibility alone. This is NOT investment advice. This article is to highlight an element of investing that you should consider in your own investment plan.
Near Retirement?
Although it's often the plan to "ride out the storm" of a market downturn, there is a time when that can be difficult. When you are relying on those investments to create your retirement cash flow. You need monthly income, which you get from your investments, and now they are down. Yikes! It's painful to sell some of your investments when they are down in value.
Selling off some of your investments in a down market is a double whammy. You are taking money out of your investment portfolio, and you are locking in losses. The money you need to live is now taking a larger "share" of your portfolio because its value is down. Double Yikes!
What to do?
One thing that you should consider when you are in the situation of relying on your investments is to prepare for the downturn that WILL, not MIGHT happen. If you are prepared for it, then when it happens, you will know what to do, how to do it, (not freak out), and best of all ... have the resources to deal with it.
So what are the goals in a down turn?
- Not take devalued investments, sell them and lock in the loss just turn them to the cash flow you need.
- Keep your investment strategy on track with all of your investement resources.
And how can you do that?
It's about having an ample cash reserve. Money that isn't in the market, holds it's value and is easily accessible for your living expenses.
How much you keep on hand in cash is variable for every person. Often a couple of months is mentioned as a good amount to keep in cash, but if you are looking to weather against stock market downturns, you might need far more than that. It all boils down to your risk tolerance and the amount you have, and need, to maintain your necessary cash flow.
The important part is that you take action to have a cash reserve that can help you get through various downturns wtihout tapping into devalued securities (as much as possible).
Your plan for cash reserves
Because everyones situation is different, there isn't a one-size-fits-all approach. The best way of handling this is to talk with your financial advisor about your concerns and how you would handle a market downturn. Together you can determine how much you feel you need to have on hand as well as how to manage those cash reserves.
Once you have done this, it's likely that those market downturns will seem a lot less painful or anxiety provoking when you know that you won't need to cash in devalued securities ... just to pay your bills.
WhiteCoat Risk Management provides these articles to help improve general risk awareness in all aspects of your life. It is not responsible for any actions you take or fail to take regarding any aspect of your financial planning or risk management. This article is provided for information purposes and is not intended to provide individualized advice. You alone are responsible for your financial decisions.
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