If you’re an investor, you’re keenly aware of market trends. For example, when the stock index closes up 20% from its low, we’re in a bull market and everyone is happy. When the index drops by at least 20% from its high, we’ve entered a bear market, and the grumbling begins. Bull and bear markets may be as regular as the seasons, but they can be nerve-wracking, particularly if you’re retired.
Suze Orman’s advice
Financial guru Suze Orman recently offered this advice via Twitter: “Once you are living off retirement income, my recommendation is to keep three to five years of living expenses in a money market account or a high-yielding savings account. That ensures that when we go through rocky times — bear markets, recessions, or unsure periods such as the current congressional disagreement over raising the debt ceiling — you can live off that money rather than make withdrawals from stock or bonds that may have lost value.”
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Orman suggests that retirees aim to pay monthly fixed expenses with guaranteed income. Guaranteed income includes Social Security, pensions, rental properties, and annuities.
According to Orman, if you can cover your monthly expenses with guaranteed income, you don’t have to worry about dipping into retirement to pay bills. You’ll only have to draw from retirement savings when you need money to do something you want to do, like take a trip or start a new hobby.
The funds kept in a money market account or high-yield savings account are liquid, meaning you can withdraw them without penalty. More importantly, you give the money in your retirement savings account time to recover.
What history teaches us
The advantage of being able to pay bills with guaranteed income is that you never have to make a bad situation worse. During a bear market, investments lose value. However, bear markets don’t last forever. According to Hartford Funds, there have been 27 bear markets in the S&P 500 Index since 1928, and the average length has been 9.7 months.
The critical point is this: Following each bear market has been a bull market that’s lasted an average of 2.7 years, significantly longer than the bear market. More importantly, stocks lose an average of 35% in a bear market but gain an average of 114% during a bull market.
Orman advises leaving your investment funds alone while stock values are being battered. You want those stocks to remain in your account so they can benefit from the dramatic gains that occur during the next bull market.
And the best way to leave those investment funds alone is to put money away in a money market account or high-yield savings account that you can draw on when you need a little extra.
A realistic approach
Let’s say your fixed monthly expenses amount to $4,000. If you put three to five years’ worth of living expenses in a liquid account, you’ll need $144,000 to $240,000 in that emergency fund. That’s not feasible for most people.
Instead, look at how much money you’re short each month and make sure you have enough put away to cover the shortfall. Here’s an example:
|Fixed monthly expenses||$4,000|
|Amount to aim for in MMA or savings account||$18,000 to $30,000|
Plan for the worst and hope for the best
Remember to add a little extra to cover less common expenses, like HOA dues, property taxes, or out-of-pocket medical expenses. And if possible, pad the account with enough to cover emergencies, like car repairs, or to pay the deductible on a homeowners insurance claim.
By now, you may feel like a pro. As an investor, you’ve likely ridden out enough bear markets to know what to expect. After all, a person who spends 50 years investing can expect to live through approximately 14 bear markets.
The goal — and Orman’s point — is to avoid potential stress by planning for the next inevitable bear market.
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