Buffer, secure, optimize and “CARE” for your assets
During times of increased uncertainty, finding ways to lessen or moderate the impact of market volatility and move forward can be daunting for many investors.
“That’s why planning is so important,” said TIAA Individual Advisory Services Chief Planning Strategist Dan Keady, CFP®. “Your plan not only provides a valuable roadmap for the future, but a structure you can draw upon to buffer, secure and optimize your assets as circumstances and conditions change.”
That begins with knowing which levers to pull and when. Below, Keady addresses some of the levers available to investors seeking to remain on track toward their goals in challenging times.
Create a buffer
“When the market is in flux, you want to avoid drawing down on long-term assets, which are assets you don’t intend to use for 3 to 5 years or longer, or reduce drawing down from assets that have greatly declined in value,” Keady said. “That can be hard to do when faced with ongoing volatility, but remember, you only realize a loss when you sell securities or draw down investments that have dipped in value from your portfolio.”
That’s why your investment time line plays such a critical role. “People often forget that they don’t need 100% of their assets the day they retire,” he said. “If you’re age 65 and just preparing to retire, you’re still a long-term investor. You need that portfolio to continue generating income and growth for another 20 years or more in retirement. Equity investments remain a key part of your portfolio for long-term growth.”
It’s also important to remember that in a declining market, you still own the same number of shares.
“Even if the value of those units of ownership have declined, the number of units you own has not,” Keady stated. “As long as you remain invested, you preserve those units of ownership and reduce potential losses.”
“That’s critical for recovery—when the markets begin to rise again,” he added. “If your plan is to get out now and buy back in during the recovery, more likely than not, you’ll be buying in at higher prices, meaning you’ll end up with fewer shares than you own now.”
Secure your income
Next, you want to look at how much of your income is (or will be) derived from guaranteed sources in retirement, such as Social Security, pensions and other lifetime income sources such as fixed annuities.
“If you’re retired and this income adequately covers your current lifestyle needs, you may not need to make any adjustments,” Keady said.
That’s because guaranteed income sources, such as Social Security retirement benefits and lifetime income from fixed annuities, provide a set amount of income each month and are not subject to market fluctuations.
“If you need to draw additional income now, you’ll want to look at the assets and account types you own that haven’t lost value, such as your emergency savings. Drawing from those assets first helps to ensure you don’t lock in long-term losses by drawing down on fluctuating assets,” he said.
You also want to assess your guaranteed income sources if you’re planning to retire within the next 12 months. If you’ll have enough income from guaranteed sources to cover your essential needs and lifestyle wants, you may be able to retire as planned. However, if those guaranteed income sources fall short of covering much of your lifestyle expenses, you may want to hold off on retiring for another year or so to allow your long-term investment accounts to potentially benefit as the markets recover, unless you are clearly funded in your financial plan. As always, make sure to talk to your advisor before making any changes to your plan.
Optimize your assets
Your goals are another area where levers can be pulled to help improve short-term cash flow and longer-term investment needs. The goals you’ve identified and prioritized during the planning process drive your income needs over time.
“Maybe that cabin on the lake you planned to purchase can wait a few years, or maybe take it off the list altogether as your priorities change,” Keady said. “You may also see a reduction in spending, due to the current pandemic, as people stay at home and avoid concerts and events, dining out, public transportation and travel.”
For opportunistic investors seeking to invest excess cash, today’s markets may offer the ability to invest at more advantageous prices, with the goal of increasing their overall units of ownership as markets recover. For example, if you established a 529 education savings plan account for your 2-year-old granddaughter, those assets won’t be used for many years. In fact, it may even make sense to add to this account if you have cash on the sidelines that you don’t anticipate needing for current living expenses in the next 5 to 10 years. That enables you to purchase more shares at lower prices and position the account to potentially benefit even more when markets begin to recover.
“These are among the different types of scenarios your advisor is able address through our dynamic Life Goals Analysis (LGA) financial planning process,” Keady said. LGA enables TIAA advisors and their clients to prioritize goals, engage in scenario planning to stress test specific asset allocations and financial strategies, and optimize lifetime income sources, with the goal of creating clarity and confidence in any market or economic environment.
Take advantage of new opportunities presented by the CARES Act
According to Keady, TIAA advisors are also talking to clients about new planning opportunities available through the Coronavirus Aid, Relief, and Economic Security ("CARES") Act signed into law on March 27. For example, the CARES Act enables individuals who are required to take required minimum distribution (RMD) payments in 2020 to waive their distributions for this year. Those individuals who turned 70 ½ in 2019 but chose to defer their first payment into 2020 and receive the distribution before April 1 are also eligible to defer their distribution. Those who have already received a distribution will have the option to roll the money back into the plan or IRA.
“The ability to waive or defer an RMD in 2020 may help many retirees avoid locking in investment losses in a down market,” Keady said. “For those nearing retirement, the act also includes a provision for retirement plan loans to individuals who qualify for coronavirus-related distributions.” To qualify, distributions from qualified retirement accounts, such as a 403(b) or 401(k), must be made within 180 days of enactment of the legislation. The act increases the maximum loan amount from $50,000 (or 50% of the vested account balance) to $100,000 (or 100% of the vested account balance). Also, for any repayment on a loan due between enactment and December 31, 2020, the due date for the payment would be delayed for one year, and the general five-year limit on the duration of the loan is extended by one year.1
“However, if you’re unable to repay the loan after one year, a 10% penalty and ordinary taxes will apply to the outstanding loan balance,” Keady said. “These are just a few of the levers people can pull during this time of uncertainty,” he added. “Some people may see an opportunity to refinance their mortgage to lower their monthly payments, or take out a home equity line of credit, or HELOC, to help manage short-term cash needs. Your advisor can offer guidance through all of these decisions.”
“We can’t emphasize enough how important it is for people to speak with their advisors at this unprecedented time,” he continued. “The ability to remain on track toward your goals is dependent on making informed decisions that support your objectives and are fully aligned with your income needs. Your advisor is available to meet with you via phone, web conferencing or email, based on your preferences.”
To learn more about the steps you can take now to buffer, secure and optimize your plan and remain on course toward your important goals, contact your TIAA advisor today to schedule time to talk.
1Subsequent loan repayments must be “appropriately adjusted” to reflect the extended due dates and interest accrued during that period. Adopting this provision is optional for plan sponsors and the plan would need to be amended by the end of 2022 (2024 for governmental plans).
This material is for informational or educational purposes only and does not constitute investment advice under any securities laws. This material does not take into account any specific objectives or circumstances of any particular investor, or suggest any specific course of action. Investment decisions should be made based on the investor’s own objectives and circumstances.
Advisory services are provided by Advice & Planning Services, a division of TIAA-CREF Individual & Institutional Services, LLC, a registered investment adviser.