Ken Moraif, senior planner at Retirement Planners of America, talks about how to shock-proof your retirement from financial crises.
ADAM SHAPIRO: I don’t want to jinx it, because we still have six weeks left in the year– and while retirement accounts right now we’re looking pretty good, there’s still six weeks to go. But what about next year? And what if you’re worried about a bear market in 2022 and you’re approaching that period when you have to convert the 401(k) into something else?
Let’s talk about all of this with Ken Moraif, Senior Planner at Retirement Planners of America. And we want to mention that this is part of our retirement series brought to you by Fidelity Investments. Ken, good to have you here. Are your colleagues hearing concern that the good times can’t last forever, and then the question, what do we do to prepare for the bad times?
KEN MORAIF: Retirement planning is a paradigm shift for a lot of people, because during your lifetime, you’ve been saving, you’ve been investing, you’ve been sacrificing to accumulate your money. And because you have wages, you can be a little bit more aggressive. You don’t have to be as defensive.
But once you get within five years of retirement or you are within the first five years of your retirement– so that decade, that 10-year period– that, in our view, is a single most important decade of your entire financial life. Because no matter how well you accumulated, and saved in your 401(k), and did all that stuff, if you take a 30%, 40%, 50% loss, like many people did in Y2K or 2008, that could significantly impair your ability to retire or stay retired.
So, yes, mitigating or planning for bad times is an important part of retirement planning. And you know, when I ask our clients, and people at our seminars, and that kind of thing, I ask, between now and the rest of your life, what do you think the odds are we’re going to have another bear market? Pretty much everybody says it’s about 100%. And so therefore, doesn’t it make sense to plan for something that you think there’s 100% probability of?
ADAM SHAPIRO: OK, so, Ken, if we’re talking to, I’m going to just say, 54, 55-year-olds and that 10-year horizon is right in front of them, don’t we usually recover those drops? And, look, 2008 and, of course what we saw with the pandemic, those were I can’t say once in a lifetime, but those kinds of 40% drops are just once in a lifetime, twice in ours at this point. But how long does it usually take us to recover?
I think in 2008 it took us roughly two to three years to fully recover. And the pandemic, it was less than a year and a half to recover. It was less than a year to recover. So what do you advise the client?
KEN MORAIF: Well, so, let me– forgive me for doing this, but let me correct you. 2008 actually didn’t recover for five years back to where it was. But the interesting thing about 2008 is if you go back to 2000, and you look at where the S&P was, and then you had the bear market of Y2K, it came back to basically even in 2007ish. But then it went down again and got back to even again in 2013.
So somebody who retired in 2000, it actually took 13 years to get back to even. But the most important– if you look at the studies that have looked at making sure that your money lasts as long as you do, one of the most important risks that you need to address is what’s called sequential risk. And sequential risk is, when do you take a large loss?
And if it happens early in your retirement or it happens while you are close to retirement, then that sequential risk works against you. And so protecting against that is extremely important. One of the things that, you know, people say is the market’s going to come back, don’t worry about it. While that may be true, keep in mind that in the Great Depression, it took 25 years to get back to even. It was 1954 before it got back.
So you know, last year was an anomaly. The Fed threw $3 trillion at it and the problem was solved. But in previous periods, the Fed has not always been as able to deal with bear markets. The important thing–
ADAM SHAPIRO: Let me interrupt you. What would a 55-year-old, though, do at this point? Is it too soon to be looking at annuitizing using some of your investment so that you have guaranteed kick-off of income? Because the rates on annuities right now are bupkis.
KEN MORAIF: No, I agree with that. No, a 55-year-old would not be doing that. As you are heading into your retirement, and it depends when you’re going to retire, but if you’re saying you’re retiring at 65 you’ve got 10 years, you can still be relatively aggressive. It’s when you get within five years of your retirement.
So if you’re 55 and you’re retiring at 60, you need to start thinking about how to protect what you’ve built. And I’m not necessarily advising that you have annuities, although they might have a place. What I’m talking about is having the right risk profile, how you’re diversified, making sure also that you have a defensive strategy.
You know, for us, we have a strategy that we call invest and protect. It actually told us to sell literally the day before the pandemic was announced and to get out and protect against large losses. So having a defensive strategy is what institutional investors do, what professional investors do. But unfortunately, the retail investor is just told to buy and hold, and stay in, and whatever happens, just live with it.
ADAM SHAPIRO: Full disclosure– I was talking to my people, the Gen X generation, because there’s a lot of us who are looking at that 10, 15-year horizon that you were just mentioning, and yet many have that sandwich situation– parents and children. So a lot riding here. Ken Moraif, Senior Planner at Retirement Planners of America, thank you for joining us.