I saw The 39 Steps on Broadway last Thursday, and had a few good laughs. It’s a clever comedy where four actors portray over 100 characters wrapped up in espionage with an homage to Hitchcock. Even though the play wasn’t related to finance, my mind drifted to the massive losses hitting investors around the globe.
The market is still making some scary moves, leaving a lot of people with vertigo. I am lucky because I have more than 30 years for my portfolio to recover, and plenty of time to shift my plans and reset my expectations before I need to start withdrawing money.
If you are closing in on retirement, it’s time to revisit your financial plan. If you don’t have a plan, it’s also a good time to put one together. By taking time to think about your needs and expectations, you’ll be able to make smart decisions about your finances and feel more secure in your future.
Recently, I gave these suggestions to a friend planning on retiring in the next 5 years. Her portfolio is overweight in stock, and she has been gradually shifting it to a balanced asset allocation. She wanted to know if she should take money from her rollover IRA to pay credit card debt.
- Save as much as you can to get the biggest company match
- Invest all retirement new money in the money market
- Put all extra money against your credit card debt
- Continue the gradually shift to a Balanced stock/bond/cash portfolio
The concept is to build up a cash and bond portfolio for stability. The cash will be the first money to withdraw at retirement, giving stock positions more than 5 years to potentially come back (admittedly, there is a lot of growth to recover here).
By withdrawing money from a retirement stock portfolio right now to pay credit cards, you would be selling at a low point in the market. While the market can still go down, my suggestion is still to make gradual moves. The other issue to be aware of when you withdraw from an IRA is taxes. If you take 10k out, your income goes up by 10k, and you will owe more taxes this year.
While this advice fits her attitude towards investing, it’s not right for everyone in that situation. Consider this question as a guide for your approach today. What did you do when the dot com the bubble burst? And then on 9-11? This is a great indicator of your stomach for volatility. If you didn’t sell off then, you can probably weather the volitality we’re seeing right now, too.
