With chaos in the stock market and several of America’s venerable financial institutions in trouble, anxious investors are trying to figure out what they should do.
Around the office water cooler and at the kitchen table, people who are closing in on retirement are worrying about how to avoid damage from the financial crisis. Should they sell off investments and withdraw from stocks? Should they jump at buying opportunities created by falling stock prices? Or should they move into other investments or shove wads of cash under the mattress?
Forget the mattress. Financial advisers recommend that older adults stay focused on their goals to make the most of their investments. The bullet points remain:
• Stay diversified.
• Don’t ignore lower-interest, lower-risk investments.
• Make sure you have a balanced allocation of stocks and mutual funds.
• Keep investment costs under control.
If you prefer to keep cash liquid, make sure your bank account totals no more than $100,000—the maximum amount the FDIC insures per individual depositor. Couples in joint accounts are insured up to $200,000, and family members added as beneficiaries to payable-on-death accounts are insured up to $100,000 per person. (Certain retirement accounts, such as IRAs, are insured for up to $250,000 per individual depositor.)
Jonathan Scheid, chief investment officer for Bellatore LLC in San Jose, Calif., says that investors who have more money in the bank than the FDIC guarantees should spread their cash around in different institutions to get the full FDIC guarantee. Even so, he says, bank yields are too low for people nearing retirement to store the bulk of their funds in bank accounts.
Even in this financial climate, Scheid says, older workers who are relying on their 401(k) plans and other investments to increase their nest egg should not panic. They have more time to recover from market losses than they think, he says.
"People who are, say, three to eight years from retirement do have time on their side,” he says. “It’s not like they’re going to hit retirement and liquidate all their money. They have to live on the gains, the interest and everything they have from an investment standpoint, for maybe 30 years.
“Equity is going to provide some stability in meeting those long-term goals,” he says. “So they’re still a long-term investor, and they need to keep that mentality and keep that focus.”
For whose who are risk-averse, money market funds that invest only in Treasury bills—so there are no private or commercial holdings to put the fund at risk—are considered safe, liquid investments, though the yield is low, says Jean Setzfand, AARP’s director of financial security. She also recommends certificates of deposit.
“CDs are another option as long as you ladder or stagger them so you have access to that money,” she adds.
Jim Schlagheck, a wealth management specialist and author of Cash-Rich Retirement, says the economic downturn has produced bargain-priced stocks that will eventually add value to a portfolio when the market turns around. He argues that older folks should “weather the storm” and retain stocks, particularly those that pay dividends.
“Shares that pay dividends are best in times like these,” he says. “There’s ample historical research that shows they tend to go up more in good times, and down less in bad times, than non-dividend-paying stocks. You want investments that pay you money—and reinvest it—so your investment grows.”
To Schlagheck, a balanced portfolio includes 50 percent in dividend-paying equities such as stocks; 25 percent in interest-paying investments such as bonds; 15 percent in income-producing real estate investment trusts; up to 5 percent in gold reserves or precious metals, since they tend to do well in times of inflation; and the rest in commodity, energy or natural-resource funds.
“The question is, how much time do you have before you need to sell stocks and draw down on them? I’d argue that people will continue to hold stocks into their 70s and 80s, and also migrate into other investments like annuities,” he says.
Buying annuities—or charitable gift annuities from a charity or university, which come with tax breaks—may be a viable alternative for some older investors who are seeking to reduce their stock exposure and who want an income stream for life.
“This is for people who are very, very nervous about the market and want adequate income when they retire,” he adds.
To find out if your money is insured, or over the guaranteed limit and at risk for loss if the bank fails, go to the FDIC online. People who don’t have Internet access can call the FDIC toll-free at 877-275-3342.
Carole Fleck is a senior editor on the AARP Bulletin staff.