Retirement in the time of pandemic

Steve Merrell |

Q: Last January, I informed my employer that I plan to retire in June of this year. I felt confident that my wife and I had enough in savings to support ourselves with a reasonable lifestyle, but now that the coronavirus pandemic has exploded, I am scared. I worry that we won’t have enough and we won’t be able to support ourselves. I thought retirement was going to be a time to relax and enjoy life, but how can I relax when the world is turned upside down?

A: If it is any help, you are not alone in your worries. Millions of people all around the world are grappling with concerns and questions similar to yours. Perhaps this shared struggle against COVID-19 will help us better remember our shared humanity. In terms of what this struggle means as you get ready for retirement, here are some thoughts to consider.

When planning for retirement, we need to really get into the “what-if” questions. There are all kinds of what-if questions. What if the market goes down? What if my roof needs replacing? What if my spouse gets sick? What if I die early? The ramifications of each of these possibilities needs to be thoroughly explored and fully understood.

Given your anxiety, it is especially important to understand how a major market decline will affect your plan. We never know when the market will plunge, but we can be pretty sure it will. In fact, it will probably experience something remarkably unpleasant several times during your retirement. Your financial plan needs to acknowledge that reality and help you get ready for it. I have found that nothing calms anxiety quite like adequate preparation. So, how can you prepare?

A good place to start is to make sure you have adequate reserves in cash and bonds. I have written about this before, but you really need at least five years of core living expenses invested in cash and high-quality bonds. You will not hit a homerun with these kinds of investments, but they will help make sure you stay in the game. Their sole purpose is to provide funds to meet near-term needs when the stock market goes crazy.

As a secondary line of preparation, focus a portion of your equity portfolio on dividend-paying stocks. A stock’s dividend yield is its annual dividend divided by the stock’s price. As a point of reference, the S&P 500 index currently has a dividend yield of about 2.25% while most big tech stocks like Facebook, Amazon and Alphabet (the parent of Google) do not pay any dividends.

In contrast, some mutual funds invest in stocks that pay dividends higher than the market average. The Vanguard Equity Income Fund, for example, has a dividend yield of 3.35%, while a fund like the Vanguard High Dividend Yield Fund earns nearly 4%.

High dividend yields have two benefits. First, a large portion of the dividend income is taxed at the favorable long-term capital gains rate. Second, the dividend will help cushion your portfolio when stock prices fall. However, be wary of dividend yields that are too high. Super high dividend yields often indicate that a company is in distress.

Finally, you need to get yourself emotionally ready for stock market volatility. I know how difficult this can be. When I was first out of college, I worked as a government bond trader. When the market was with me, it was great. When the market went against me, it was awful. That valuable experience helped me learn how to deal with volatility-driven emotion. Here are some things that will help.

First, don’t watch the market. Most of what happens each day in the market is driven by traders whose motivations are completely unrelated to your reality. Second, hire a competent and trustworthy professional to watch over your portfolios. Their objective judgment will help you sleep better at night. Finally, stay focused on your financial goals. Make sure your conversations with your advisor are always goal-centered. Market-centered conversations, especially during market meltdowns, stir emotions that are distracting and counterproductive. Goal-centered conversations, on the other hand, are productive and empowering.



Steven C. Merrell MBA, CFP®, AIF® is a Partner at Monterey Private Wealth, Inc., a Wealth Management Firm in Monterey.   He welcomes questions that you may have concerning investments, taxes, retirement, or estate planning.  Send your questions to: Steve Merrell, 2340 Garden Road Suite 202, Monterey, CA  93940 or email them