She can't wait it out, so where to shelter from the stock storm?
March 23, 2020 10:13 AM Subscribe
I have an elderly friend who is currently retired and drawing from an IRA to support herself and her husband who is in a memory care facility. She's worried about the stock market decline cutting into this IRA tied to stocks and needs to preserve as much as possible so she can keep up her husband's care. She has received advice to move the money into a guaranteed income annuity. Should she take it?
My Googling has led me to believe, in normal times for normal people, annuities are not as good. But these aren't normal times. And my friend does not have the ability to ride out the stock market for the long term. She and her husband are surviving on it now and need some guarantees in the face of what's going on as much as possible.
Yes, YANMCPA, but what would you, the trusted hive mind, advise for people who are currently retired and living off stock-based retirement investments?
My Googling has led me to believe, in normal times for normal people, annuities are not as good. But these aren't normal times. And my friend does not have the ability to ride out the stock market for the long term. She and her husband are surviving on it now and need some guarantees in the face of what's going on as much as possible.
Yes, YANMCPA, but what would you, the trusted hive mind, advise for people who are currently retired and living off stock-based retirement investments?
I'm not a financial expert, advisor or anything like that. Whether this makes sense depends in part on numbers that you don't give. My gut however tells me that if your friend panic-sells stocks now to buy something secure like an annuity, she is probably going to pay a lot to do that. Potentially a worst-decision-of-her-life lot. It could also be the right decision.
I think the best thing your friend can do is to find a trusted financial advisor, one who doesn't work on commission, and go through this with them. If your friend is considering moving around serious money, then the cost to speak with an advisor should be relatively trivial.
If she wants to do her own research, she might look at the Bogleheads forum and wiki. Here is a starting page about annuities on the wiki.
posted by bright flowers at 11:13 AM on March 23, 2020 [3 favorites]
I think the best thing your friend can do is to find a trusted financial advisor, one who doesn't work on commission, and go through this with them. If your friend is considering moving around serious money, then the cost to speak with an advisor should be relatively trivial.
If she wants to do her own research, she might look at the Bogleheads forum and wiki. Here is a starting page about annuities on the wiki.
posted by bright flowers at 11:13 AM on March 23, 2020 [3 favorites]
Yeah, who provided this advice? There are vultures circling.
If she moves into an annuity now, presumably she will have to sell her portfolio to do so, meaning she is locking in all her losses. It's a little hard to give really specific advice without more information, but if she is like my mom--who uses the RMD from her IRA to supplement social security but is not drawing otherwise--then she has time for some stock market recovery. My mom took her RMD early in this year and so she doesn't have to do it again (legally) until the end of next year, and as a practical matter shouldn't have to until the same time next year.
Now, assuming anyone with vague competence and care for her well-being has chosen the investments in the IRA, she should be down, but she should not be getting wiped out. The Vanguard retirement target fund is down, looks like, a bit over 10%. Yikes, for a person on a fixed income, but probably survivable for the short-medium term. My mom is now tens of thousands of dollars richer than me because I put her in funds suitable for her age and me in funds suitable for mine.
posted by praemunire at 11:21 AM on March 23, 2020 [7 favorites]
If she moves into an annuity now, presumably she will have to sell her portfolio to do so, meaning she is locking in all her losses. It's a little hard to give really specific advice without more information, but if she is like my mom--who uses the RMD from her IRA to supplement social security but is not drawing otherwise--then she has time for some stock market recovery. My mom took her RMD early in this year and so she doesn't have to do it again (legally) until the end of next year, and as a practical matter shouldn't have to until the same time next year.
Now, assuming anyone with vague competence and care for her well-being has chosen the investments in the IRA, she should be down, but she should not be getting wiped out. The Vanguard retirement target fund is down, looks like, a bit over 10%. Yikes, for a person on a fixed income, but probably survivable for the short-medium term. My mom is now tens of thousands of dollars richer than me because I put her in funds suitable for her age and me in funds suitable for mine.
posted by praemunire at 11:21 AM on March 23, 2020 [7 favorites]
She has received advice to move the money into a guaranteed income annuity. Should she take it?
Without knowing anything about her situation and not being able to see the future, my reaction is "not now" for the aforementioned point about locking in her losses (aka, selling low). Then again, who knows where things will go next.
posted by slidell at 9:08 PM on March 23, 2020 [1 favorite]
Without knowing anything about her situation and not being able to see the future, my reaction is "not now" for the aforementioned point about locking in her losses (aka, selling low). Then again, who knows where things will go next.
posted by slidell at 9:08 PM on March 23, 2020 [1 favorite]
a guaranteed income annuity
Is the person giving this advice getting a commission from the sale of such an annuity? Someone who is already retired should not have their money in stocks, so if the advice giver is responsible for that situation, that is another mark against them.
What is the penalty for withdrawing from this annuity if they need more than the regular payout? That is always a concern with RMDs and has become even more important now with the uncertainty we are all facing. Do not buy something that will penalize them in the first few years for having to take out the RMD.
If someone needs to get out of the stock market, I would second the above advice about reading Bogleheads and at least one other forum that is not trying to sell anything. If it was me, I would be moving my money slowly out of stocks and into a more stable investment.
posted by soelo at 6:55 AM on March 24, 2020 [1 favorite]
Is the person giving this advice getting a commission from the sale of such an annuity? Someone who is already retired should not have their money in stocks, so if the advice giver is responsible for that situation, that is another mark against them.
What is the penalty for withdrawing from this annuity if they need more than the regular payout? That is always a concern with RMDs and has become even more important now with the uncertainty we are all facing. Do not buy something that will penalize them in the first few years for having to take out the RMD.
If someone needs to get out of the stock market, I would second the above advice about reading Bogleheads and at least one other forum that is not trying to sell anything. If it was me, I would be moving my money slowly out of stocks and into a more stable investment.
posted by soelo at 6:55 AM on March 24, 2020 [1 favorite]
Be sure to read the answers to the related questions at the bottom, especially this one: https://ask.metafilter.com/279995/Annuity-or-Stocks-for-Retirement from May 12, 2015
posted by soelo at 7:08 AM on March 24, 2020
posted by soelo at 7:08 AM on March 24, 2020
Someone who is already retired should not have their money in stocks, so if the advice giver is responsible for that situation, that is another mark against them.
Well...the Vanguard retirement income fund (which is what all the target-date funds glide down to, eventually) is about 25% in stock indexes. The current thinking is that most people live far too long past retirement now to be able to eschew equities completely while avoiding exhausting assets. We're talking 20-25 years for many. (If her health holds up, I don't expect to drop my mom into all-bonds until her early 80s.) But I endorse the general idea that the motives and competence of this advice-giver should be carefully scrutinized.
If she manages to get through this period to a market rebound, she should consider selling some then, enough to create cash holdings of roughly a year's "expected" RMD. That will extend her ability to mitigate a catastrophic drop even further. If we're still in this unpleasant scenario a year from now, my mom will have to take losses on the assets she's selling to meet her RMD...but she has sufficient cash on hand that she won't have to make radical cuts in her lifestyle. Obviously this can only go so far, but it gives her (and us) more confidence.
posted by praemunire at 9:25 AM on March 24, 2020
Well...the Vanguard retirement income fund (which is what all the target-date funds glide down to, eventually) is about 25% in stock indexes. The current thinking is that most people live far too long past retirement now to be able to eschew equities completely while avoiding exhausting assets. We're talking 20-25 years for many. (If her health holds up, I don't expect to drop my mom into all-bonds until her early 80s.) But I endorse the general idea that the motives and competence of this advice-giver should be carefully scrutinized.
If she manages to get through this period to a market rebound, she should consider selling some then, enough to create cash holdings of roughly a year's "expected" RMD. That will extend her ability to mitigate a catastrophic drop even further. If we're still in this unpleasant scenario a year from now, my mom will have to take losses on the assets she's selling to meet her RMD...but she has sufficient cash on hand that she won't have to make radical cuts in her lifestyle. Obviously this can only go so far, but it gives her (and us) more confidence.
posted by praemunire at 9:25 AM on March 24, 2020
I sensed from OP's post that their friend is way too deep into stocks for their age and comfort, as in, the large majority of their portfolio is stocks. In that case they may be in serious trouble no matter what they do.
When it comes down to it, money is fungible whether it's in stocks or bonds or whatever. For example maybe yesterday their portfolio was worth $200, and now it's only worth $100. The fact is they only have $100 worth of stuff now, and the $200 former value is irrelevant. It would be Boglehead-y to advise them to reallocate assets to something more conservative now even though they might lock in losses to do it. Or to look at it another way, if their portfolio was currently $100 all in bonds, Bogleheads wouldn't advise an older person with a smaller portfolio to move the large majority into stocks and hope the market goes up. The Boglehead goal in most cases is to move to an allocation you're comfortable with as soon as you comfortably can. In this case it's just deeply unfortunate it took a market crash for this person to realize their allocation is wrong for their situation.
Maybe an exception here would be if the market downswing were some kind of temporary glitch and you somehow knew for sure it would go up very soon. I'm not sure that ever happens, but just theoretically speaking. Suffice to say, I don't think that's the case now.
Because this is such a serious situation, it's really important for this person to find a trusted advisor and go over this in detail. The annuity thing is a red herring, I assume they're being hustled by some acquaintance or distant relative. The real question is the core asset allocation between stocks and bonds/cash.
posted by bright flowers at 2:02 PM on March 24, 2020 [1 favorite]
When it comes down to it, money is fungible whether it's in stocks or bonds or whatever. For example maybe yesterday their portfolio was worth $200, and now it's only worth $100. The fact is they only have $100 worth of stuff now, and the $200 former value is irrelevant. It would be Boglehead-y to advise them to reallocate assets to something more conservative now even though they might lock in losses to do it. Or to look at it another way, if their portfolio was currently $100 all in bonds, Bogleheads wouldn't advise an older person with a smaller portfolio to move the large majority into stocks and hope the market goes up. The Boglehead goal in most cases is to move to an allocation you're comfortable with as soon as you comfortably can. In this case it's just deeply unfortunate it took a market crash for this person to realize their allocation is wrong for their situation.
Maybe an exception here would be if the market downswing were some kind of temporary glitch and you somehow knew for sure it would go up very soon. I'm not sure that ever happens, but just theoretically speaking. Suffice to say, I don't think that's the case now.
Because this is such a serious situation, it's really important for this person to find a trusted advisor and go over this in detail. The annuity thing is a red herring, I assume they're being hustled by some acquaintance or distant relative. The real question is the core asset allocation between stocks and bonds/cash.
posted by bright flowers at 2:02 PM on March 24, 2020 [1 favorite]
It depends a lot on how big the nest egg is compared to how big her expenses are. But people who take money out of the market after a crash usually come out behind.
posted by SemiSalt at 2:25 PM on March 24, 2020
posted by SemiSalt at 2:25 PM on March 24, 2020
This thread is closed to new comments.
If it were me, I'd just stay where I was and weather the storm as best as I could. I would also probably question the motives of someone telling me to move investments during this crisis.
That being said, I'm still a hot minute from retirement so my viewpoint may be different than someone relying on those investments for current personal lifestyle reasons.
I am not a financial adviser and this is not financial advice.
posted by Sphinx at 10:49 AM on March 23, 2020