(Money Magazine) -- Question: We're in our late 60s, retired and have a comfortable amount of money in retirement accounts, mostly mutual funds. My husband wants to liquidate most of our holdings and put the proceeds in money market funds, laddered CDs, maybe an annuity, as he fears the political situation will lead to another recession. Is he right? --Sharon, Kennewick, Washington
Answer: If you're asking whether your husband is right about his concerns that the political situation will lead to another recession, my answer is, Who knows?
Considering the beating it's taken, the economy seems to be bouncing back pretty well so far. Wells Capital Management chief investment strategist Jim Paulsen even contends that the recovery at this stage looks as strong as the recoveries after severe recessions in the early 70s and early 80s.
That said, the news as the economy climbs out of a recession, particularly a severe one, is usually a mixed bag with both positive and negative developments. So it's hard to say at this point whether the recovery could stall or even reverse, whether due to the "political situation," deteriorating fundamentals or both.
But if you're asking me whether your husband is right to liquidate his mutual fund portfolio and essentially hunker down in cash and an annuity because of his fears, I can give you a more direct answer: No, that doesn't sound like a very good idea to me.
One reason is that, as a rule, I don't think investors should make drastic moves with their investments. Radical shifts are usually triggered by the gut, not the head, and acting on emotional impulse is a notoriously bad way to handle your money.
Besides, even if your husband says his actions are based on rationale rather than emotion, I have my doubts about his planned move. Getting it right when predicting trends in the economy is difficult even for economists (and no, I don't consider that phrase an oxymoron). So for your husband to tilt his investment strategy in such a heavy-handed manner to make a bet on one particular economic scenario playing out strikes me as ... let's just say not very prudent.
I also don't think it would be right to simply dismiss your husband's misgivings and tell him to sit tight. Even though I believe it's a mistake to let emotions dictate your investment strategy, you should take them into account when investing money. You can't live your life feeling you're teetering on the precipice of financial disaster. So if your husband is really worried about the damage your retirement portfolio might sustain if the market heads south, he ought to address those concerns, but in a more thoughtful, methodical way.
You say that you and your hubby are in your late 60s. I'm assuming, then, that you're looking to your investments to support you throughout retirement, which, given your age could easily be another 20 or more years.
That means that, unless you've got a ton of money socked away, putting virtually all of it in cash (the annuity excepted) would probably make it difficult for you to get sufficient income that will both last the rest of your lives and stand up to inflation over the long run.
In short, it's very likely that you should be investing at least some of your stash in a diversified portfolio of stocks and bonds that can generate some long-term growth. The trick is to get some growth, but not so much that your husband's stomach flutters every time the Dow takes a hundred-point dive.
Achieving this balance of growth and safety will depend, among other things, on how much income you need from your investments, your tolerance for watching your portfolio's value fluctuate and how much wiggle room you have for paring living expenses should investment values take a hit.
You can get an idea of how different mixes of stocks, bonds and cash might affect your income in retirement with T. Rowe Price's Retirement Income Calculator. And by going to this Morningstar Asset Allocator tool, you can get an estimate of the potential loss different mixes might suffer over a three-month period if the markets turn against you.
These are only estimates, not guarantees. The idea is to come away with a decent sense of the tradeoff between safety and potential income for different investment strategies.
Now, about that annuity. You don't mention what type your husband is considering. But a type of annuity known as an immediate annuity can be a good way to supplement Social Security with additional guaranteed income that will last as long as you or your husband are alive.
Making an immediate annuity part of your retirement portfolio could make sense in your situation for two reasons. First, the steady income, which you get regardless of what the market is doing, may allay some of your husband's anxiety about the economy and the markets. That, in turn, may make him less apt to batten down the hatches in cash and more inclined to devote at least a portion of his portfolio to investments that can generate growth.
Second, combining an immediate annuity with traditional assets like stock and bond funds can actually help your retirement savings last longer, which is a definite plus for retirees.
The bottom line is that whatever you and your husband end up doing, you should do it based not on some vague notion of what the political situation may do to the economy. Rather, you should make a plan after considering several alternatives and seeing what effect those different choices might have on your ability to live off your investments the rest of your life.
|Overnight Avg Rate||Latest||Change||Last Week|
|30 yr fixed||3.80%||3.88%|
|15 yr fixed||3.20%||3.23%|
|30 yr refi||3.82%||3.93%|
|15 yr refi||3.20%||3.23%|
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