On the Sidelines at Age 60: Is that the Prudent Choice?
by , CFP®, President, Charles Schwab Foundation; Senior Vice President, Schwab Community Services, Charles Schwab & Co., Inc.
May 19, 2010
I freaked out in late 2008 and went fully into cash; I missed out on big losses, but also missed out on gains. I have about $350K in cash in several 401(k)s. I'm 60, my job situation is very insecure, and I have a mortgage, kids, and no pension. How can I preserve capital?
I'm sure a lot of investors found the markets confusing—and unsettling—in 2008 and 2009. Your move into cash may have let you avoid part of the downturn (it's always nice when you manage to dodge part of a bear market), but as you seem to recognize, that defensive of a position is probably not the best for the long run. You are wise to be rethinking your strategy.
You say that your job is "insecure," but even so, you are very young to be focused exclusively on capital preservation. If you're in reasonable health, you could easily and hopefully live another 25 or 30 years—or more—and it will take some growth, not just preservation, to finance that.
So the real issue, as I see it, is how to help you survive a possible period of unemployment and
stay prudently invested for growth. Here are some suggestions:
Put a year's worth of living expenses into something safe.
It's vital you have a cash cushion—an emergency fund—to handle the worst-case scenario of losing your job. So earmark a year's worth of living expenses in your 401(k) and park it in a money fund or in a series of CDs (for example, with three-month, six-month, nine-month, and twelve-month maturities).
Because you've reached the age of 59½, you can tap your 401(k) in an emergency without having to pay a 10 percent penalty. However, you will owe taxes on any distributions. So unless and until you need it, leave that money in your 401(k), safe and growing tax-free.
Cut expenses now.
Your short-term reality is that you might have to live without a paycheck for a while, so start preparing by cutting your expenses now. Every household can find ways to economize, and the money you save should go into your emergency fund. (An ideal outcome would be that you save enough money so that you won't have to dip into your 401(k) at all.)
Keep funding your 401(k).
I recommend continuing to fund your 401(k) at work if possible, at least up to the level of a company match. Otherwise, you are walking away from free money, and possibly further jeopardizing your eventual retirement.
Get back into the markets with a prudent asset allocation.
Preserving capital doesn't always mean giving up on growth completely; there is a middle ground between all equities and all cash. For example, you could divide up your non-cash investments along the lines of 40 percent stocks and 60 percent bonds. That will provide some growth potential and some income, and the mix should be less volatile than an all-equity portfolio. And within these categories, be sure to get broad-based diversification. For stocks this means large cap, small cap, different sectors and industries, and some international exposure. For bonds, be sure to diversify by maturity to reduce interest rate risk.
I also think your retirement investments might be easier to manage if you roll your various 401(k) accounts into a single Rollover IRA. Think about consolidating your accounts so you can more carefully monitor your results and rebalance as needed.
Start looking for a job now.
If your job situation is truly precarious, start looking for a new position now. You might find something better (with more security), and at least you'll have a head start on the process if you do get laid off.
Wait (if you can!) to start taking your Social Security benefit.
As you probably know, you can begin receiving Social Security benefits as early as age 62—but this comes with a permanently reduced monthly benefit. For that reason (and especially for those who anticipate a long life), if it's at all possible, I generally recommend waiting until what the IRS has designated as your “full retirement age,” which for you will be 66 (benefits will continue to increase until you reach 70, but that can be too long for many people to wait). On the other hand, if you absolutely need the money to live on, you can take Social Security sooner.
A market upheaval or the prospect of a looming financial issue like a layoff or retirement causes many people to value—or even overvalue—capital preservation. But remember, you may have a very long retirement, and that takes a lot of money. Most people need a growth component in their portfolio to help ensure that their assets last as long as they do. So put aside some money in case you lose your job, but stay invested—prudently. Good luck.
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