From the mailbag: I’m about to retire and I’m scared out of my stocks

A correspondent asked:

I plan to retire in a couple of years and the current state of the world and stock market is scaring me. Should I sell my stocks before the market crashes even more?

Wary in Wareham

Hi Wary-

Most everyone has been asking a variation of this question. I don’t know what the future holds for the stock market but no one else does either.

If you decide to sell all your stocks, you have to put the money somewhere and, broadly speaking, your investment options are the following:

• short-term savings — currently yielding ~1%
• intermediate- or long-term bonds — currently yielding 1 to 3%, depending on the type of bond
• real estate — these returns vary but they’re probably similar to owning long-term bonds, coupled with the joy of being a landlord

By comparison, the stock market has historically averaged annual returns of 10% (with a lot of volatility). However, let’s assume future stock market returns are lower — more like 7%.

Over 20 years, the difference between 2% and 7% returns is significant.

• at 2%, $1.00 compounds to $1.50
• at 7%, $1.00 compounds to $3.87

Selling all your stocks doesn’t eliminate risk but instead, just trades one risk (stock market volatility) for another (running out of your savings at a later age).

If future stock market returns are anywhere close to the past, over the long run, it will be costly to sell your stocks to avoid the stress you’re feeling.

So what should you do?

1. Choose the optimal asset allocation for your age, risk tolerance, and financial situation.
2. Ensure your investments are well-diversified, including non-US securities, intermediate- and long-term bonds, etc.
3. Minimize your investment expenses. Mutual fund and financial advisor fees can erode a meaningful amount of your net worth over your remaining life time.
4. Minimize your investment taxes by optimizing your use of tax-sheltered retirement accounts.
5. Re-finance your mortgage or other consumer debt. Interest rates are at all time lows so if you have outstanding loans, you may be able to reduce your payments.
6. Consider a single-premium income annuity for some of your savings. With an annuity in place, you can afford to take more stock market risk as this income is guaranteed for life.
7. Delay claiming Social Security (up to age 70). This is the world’s best annuity and unless you believe your life expectancy is low, it pays to wait and maximize the benefit.
8. Lastly, track your total spending and develop a sense of what is mandatory versus discretionary. You’ll then know how much leeway you have to cut back if it becomes necessary in the future.

Still not sure what you should do? Get in touch to learn about my Retirement-Readiness service. You’ll get a clear picture of how financially secure your retirement may be, along with the options you have to improve your situation.