Cash: what's not to like?
Q: As a longtime follower of the Couch Potato portfolios, and now as a retiree drawing from my savings, I have a question about management. While working, I invested regularly through payroll deduction. I didn't try timing the market. I rode the 2008 downturn to its bottom, all the time buying new shares from monthly salary deductions. I recovered my pre-recession value well before the market fully recovered.
But now I'm retired and have no more new money. I'm in a hybrid portfolio of the Standard & Poor's Total Market, international ETF, TIPS, REITs, energy plus some value ETFs.
Everyone knows there will be a future downturn, either another recession or a correction of 20 percent or so. But obviously no one knows when. It would seem at least a correction would be due when the Fed starts raising rates.
Would it be prudent/wise to rebalance by draining the sectors doing well? Then, instead of putting the proceeds into the other sectors, building some cash for purchases once the correction/recession hits?
It seems like the TIPS will go down when the Fed does its thing, which might bring everything down as well. My total portfolio is about $1 million. I live on Social Security and my Navy retirement. I withdraw whatever I need up to a maximum of 4 percent of my portfolio at the time of retirement. - J.M., by email
A: You've put your finger on the issue that all retirees face. The constant saving that works so well while accumulating money is powerfully destructive when it runs in reverse and we start withdrawing money. That's what the whole "safe withdrawal rate" discussion has been about.
When you make a planned withdrawal in a bear market, you've upped the withdrawal rate as a percentage of the portfolio. That, in turn, reduces the number of years the portfolio is likely to last. One way to deal with this is to have a cash reserve as part of your portfolio. Then draw from that during a bear market rather than sell securities at rock-bottom prices.
A better way, I think, is to have some rules about withdrawals in bear markets. Research has found that having simple withdrawal limit rules can increase the odds that your portfolio will survive a long time. Since a large portion of your living expenses is probably covered by your combined Social Security and Navy pension income, a few spending rules will probably work well for you.
One of the best people to read in this area is Wade Pfau, a prolific researcher (and professor) at The American College. You can find his blog at retirementresearcher.com.
Q: I have a question about some retirement accounts I have. I am a teacher and have just finished year number 27. Besides my teacher's retirement account, I have a 403(b) with $63,684 invested with Franklin Templeton and a Roth IRA worth $7,661 with Vanguard.
I am not making any contributions to either account and, after reading a recent column of yours, I wondered what advice you would have about these accounts. Should I consolidate? Should I put 403(b) funds into the Roth? Should I start contributing again? I plan to retire in eight years, when I am 62 years old. - K.J., Akron, Ohio
A: These accounts aren't interchangeable, so you can't consolidate willy-nilly. Since you have 27 years in teaching, you'll likely have a relatively good income base from your pension. That will make flexibility in income very useful.
So you might start by renewing your contributions to the Roth IRA account. It has the lowest expenses. And when you are retired, you will be able to make withdrawals without having to pay taxes on them. That's flexibility.
With your 403(b) account, you'll need to start making required distributions after you turn 70, and any distribution will be added to your taxable income. That limits your flexibility because all money withdrawn is taxable.
The limit on IRA contributions, Roth or traditional, is $6,500 for those over 50, $5,500 for those under. And since the Roth contribution is from after-tax income, that limit is a healthy percentage of most teacher salaries. If you can save more than that, or are in a high tax bracket (at least 25 percent), then you might consider more contributions to the 403(b) plan.
• Questions about personal finance and investments may be sent by email to scott@scottburns.com. Scott Burns is a principal of the Plano, Texas-based investment firm AssetBuilder Inc.
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