Capitulation is Not an Option in Retirement

Well it happened, the S&P 500 is officially is down over 20% and that means a technical recession is occurring. What does it mean to you with your retirement funds taking a serious hit? One thing it doesn’t mean is that you should capitulate and sell all your equity funds and rush to cash. On this one point i agree with the financial industry but with qualifications.

Unfortunately it is too late for that. If you didn’t use a stop loss or instruct your financial planner to exit your funds at a loss acceptable to you, you have now become a genuine long term buy and hold investor.

The financial planning world has got you where they want you. What’s left of your money is safe for them to use and lose testing the market looking for the next bull.

Capitulation is not an option in retirement. You will realise losses that may be hard to replenish because you will not be contributing to your nest egg but just relying on the market to recover the losses. What you need to do now is work out what you can do to minimize the effect on your retirement and ride it out.

This is a financial crisis – your financial crisis. So treat it with respect. Make no mistake about it, your financial survival depends on you taking control of your nest egg and NOT leaving it to your financial planner alone or the markets to fix the problem. Your financial planner may be steeped in the faith based buy and hold mentality and no good to you what so ever at this time. The market just doesn’t care about you. It will do want it wants. So you are on your own.

The first thing to do is you should immediately meet your financial planner and work through the investments you have. Consider instructing them to redeem any funds where the losses are 10% or less and put them into cash, term deposits or other fixed interest accounts. You can create an income ladder for yourself to get higher interest. The main purpose of this is capital preservation, to give you money to live on and money which is in your direct control. It will also reduce your fees by about half. Remember in any financial crisis cost cutting and securing ready cash are an essential to long term survival.

Knowing you can draw a pension from these funds can help put things in perspective, reduce the emotion, and it will also give the market time to recover and hopefully give you back some of your money. If you can pull out enough money to support yourself for 3-4 years so much the better.

If you pull your money out of a diversified portfolio it is likely to come out of the fixed interest and cash portions. You need to ensure your financial planner doesn’t re-balance the rest and reallocate money back into fixed interest and cash. This happened to me with about $60K I had left in my WRAP account. The WRAP account was set to automatically re-balance every quarter. It just sold my equity assets holdings in March (bad time to do this) and redistributed the money between all asset classes. On paper it cost me $7K in realised losses plus transaction costs. I was compensated for the losses but it should not have happened if they were properly looking after my account.

You should also put a strategy together with your financial planner on how you want your WRAP account managed from here on in. Right now you could well be sitting on losses of more than 20% in your equity funds, so a sell order is out of the question. Rule #1 – Avoid Large Losses in Retirement, has been violated.

If you were in a balanced portfolio then it is likely that 50% of your nest egg is in risk-based assets like equity funds. You may want to reduce this. I prefer no more than 30% in risk based assets in my retirement and I might adjust that downwards in a bear market. I figure if I lose 50% of the value of those assets and decide to capitulate and sell everything it would give me a 15% loss on my nest egg. Tough but I should still have about 85% of it left and can stand aside cashed up waiting for the market to come back. Cash is a position even though your financial planner may tell you different.

So now is not the time to throw in the towel and capitulate. it is time to secure cash under your control, reduce fees as much as possible and put a strategy in place for the future that clearly states what you expect of your financial planner.

One Response to “Capitulation is Not an Option in Retirement”

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