top of page

A Bigger Advantage for Medicare Advantage Plans

Thomas Shultz (2)_edited.jpg

By Thomas Shultz

Close to the end of December, we received a call from a 62-year-old gentleman, a neighbor of one of our clients. After a quick introduction, he asked, "I've heard from my neighbor that you work in the stock market. I wanted to discuss my investments. Can you please help?"
"Sure," I said, sensing that he wanted to discuss his stock portfolio with me. But he started talking about his upcoming retirement - planned for 2019 - and about a plot of land sitting in his hometown waiting to build his retirement home next year.
He said he had been saving and investing as much money as he could for his retirement and for building this home. He had almost 90% of his money invested in stocks and equity funds. The stock market's recent volatility - and especially in the banking and finance space, where the gentlemen are invested heavily - has made him lose around 30% of his portfolio value in a span of just a few weeks.
Now, this discussion is not about banking and finance stocks, how good/bad they are, and how quick/long they would take to recover. This discussion is about lessons from how this gentlemen’s retirement seems to have gotten compromised at least for another few years, thanks to the decline in his stock portfolio less than a year from his retirement, and how you may avoid a similar fate when you stare your own retirement in the face. The gentlemen told me how the recent dip in his portfolio brought back some painful memories, like from 2008, when he had seen his retirement portfolio lose around 50% of its value. At the time, while he was more than a decade away from retiring, the decline in portfolio value was still a significant portion of his total family savings.
He now worries it will be harder to recover another big loss so close to retirement. "It's impossible to try and time the market," he told me. "To sit there and watch your investments fall apart is hard, but if you take it out and it goes up, that's not good either. It's hard!”
As a financial advisor, when people ask me how much money they should invest in stocks versus other avenues like bonds and fixed investments, etc., my response is consistent - "It depends on when you need the money."

My general rule of thumb is that any money that you need in less than three years (maybe five years, if you’re a little riskier) must be protected as far as the core capital is concerned. You are not seeking growth here but safety. And thus, this kind of money may be kept in liquid funds, fixed investments, and some part cash. Don't invest this money in the stock market, because if the tide turns for the worse during this period (like it had done for this gentlemen), your financial life and retirement may get compromised.
Any money you need between the third and fifth year from now may be invested in stocks/MFs versus bonds/cd’s/annuities in a ratio of 50:50 (again, choose your own ratio based on your comfort levels).
This leaves us with money that is needed beyond the next five years. This may be invested fully in equities. History has proven that equity returns improve with an increase in holding periods. So, the probability is on your side when you invest your long-term money (needed beyond five years) in equities.

You may also divide this long-term money into two separate buckets. The first bucket could be the money you need between the fifth and tenth years of your retirement, say between 70 and 75 years of age (assuming you will retire at 65). This money could be invested in high-quality, well-diversified mutual funds or high-quality, stable businesses that provide not just the possibility of some growth but, more importantly, capital preservation.

As for the second bucket of your long-term money, which you will require beyond ten years from retirement, you can be more aggressive and invest that part in high-quality mid- and small-cap stocks and/or funds. Here, the risks you take will be higher than the first bucket, but the probability of growth is higher too. Just ensure that you don't buy businesses that may lose your capital permanently here too. This is a non-negotiable, even when you extend your investment horizon.

The idea of such allocation across buckets is that the more time you have before you need the money, the more aggressive your investment strategy. You may probably live another fifteen to twenty years or more after you retire, leaving you more than enough time to ride out not one, but multiple stock market crashes. So why not take advantage of the potential time on hand? However, that's not a mandatory thing. As Warren Buffett has said, "It's insane to risk what you have for something you don't need." Let's move ahead from the allocation part to a bit about cash flows. Having enough cash on hand to avoid withdrawing funds during severe market declines can be reassuring to people in or close to retirement. That means if you are three years away from retirement, a good rule of thumb will be to keep one year of expenses out of the market and then increase that for every year closer to retirement you get. So, by the time you retire, you will have three years of expenses as cash in hand. Combining this with the allocation part mentioned above,
keep this cash safe in liquid funds, fixed annuities, and some part cash. If you've still got more than a decade to go before you retire, you can follow the above-mentioned rules, both in terms of allocation and cash flows. You can be more aggressive in terms of allocation to (high-quality) equities, as doing so would likely increase the long-term growth potential of your savings - which could increase your chances of achieving a secure retirement even more. Also, save more, especially if you've been delaying it and effectively relying on market gains to compensate for your savings deficit in recent years. Markets have no obligations to carry your shortfall. When you save more, you create for yourself a buffer to deal with big declines in the stock market and your portfolio value and raise the chances of success back to where it was before the market setback. The bottom line is this: You can't predict when a bull market will stumble or know for certain how severe the ensuing bear market will be. No one can, but giving your retirement planning a stress test before the market slumps and thinking rationally about how to react will put you in a much better position to weather any crisis than making decisions on the fly while you're under duress.


Here at Lyfe Advisors, we put together comprehensive financial plans for folks every single day. Even if you are currently working with an advisor, a 2nd opinion in this type of market on your portfolio is paramount.

Are you prepared financially for retirement, preserving your legacy, or a medical emergency?

bottom of page