(PUB) Investing 2016

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How Retirees Should Assess Their Liquid Assets Portfolio Matters | Christine Benz

Step 1 | Reassess Your Emergency Fund Given that one of the key reasons to hold an emer- gency fund is to tide you over in case of unexpected job loss, it may not seem necessary to maintain an emergency fund once you stop working. But at least some type of an emergency fund remains essential in retirement, too, in that it can allow you to cover large, unexpected expenses without having to raid your long-term assets. Think new cars, new roofs, big vet or dental bills, or emergency calls to aid family members. What “lumpy” expenses have tended to catch you off guard in the past? What new ones could crop up in retirement? In a past Morningstar.com Discuss forum thread, summarized in this article, many posters said that dental bills were the biggest cost that surprised them in retirement. And despite Medicare Part D coverage, pharmaceutical costs can represent another big-ticket, out-of-pocket outlay for many retiree house- holds. (Of course, if you have a recurring prescription expense, it’s wise to factor that into your household budget and find the Part D plan that best covers the prescriptions that you take.) If you own a home (espe- cially an aging one) and are on the hook for ongoing maintenance costs, that argues for a larger emer- gency fund than if you’re a renter; people who own cars or have pets are also likely to have unplanned outlays from time to time. It’s also a fact of life that financially healthy family members are sometimes asked to help adult children or siblings who are in a financial bind; if you’ve been a financial savior for your relatives in the past, you could find yourself in that spot in the future, too. Step 2 | Consider the Bucket System In addition to setting aside an emergency fund, retirees may also want to consider a cash component as part of their long-term portfolios. The virtue of that cash “bucket” is that in difficult market environ- ments, either for stocks or bonds, the retiree can Just how large your in-retirement emergency fund should be depends on your personal circumstances.

Cash: It’s the asset class investors love to hate. Even as a declining interest-rate environment has helped both stocks and bonds deliver decent returns during the past decade, poor cash investors have had to settle for ever-lower yields. Today, money market yields are barely positive, and even higher-yielding cash options like high-yield savings accounts won’t likely keep up with inflation over the long run. Nor are cash yields likely to get appreciably better anytime soon, as the Federal Reserve has telegraphed its intention to move slowly on rate hikes, lest it disrupt an economy that is not precisely booming. But even though cash looks like a big, “Why bother?” today, it remains an essential ingredient in all financial plans, including those of retirees. Not only can it help meet unplanned expenses, which occur in retirement just as at other life stages, but it can also help on the peace-of-mind front. A cash compo- nent is the linchpin of the “bucket strategy” for retirement portfolios, enabling retirees to tolerate the fluctuations that will accompany the stock and bond components of their portfolios. And given that market valuations aren’t especially cheap today, opportunistic investors may also like the idea of main- taining some “dry powder” that they can put to work in beaten-down assets, whether stocks or bonds. Yet even as cash provides stability and liquidity, low yields are an opportunity cost, so it’s important to not go overboard. If you’re retired or getting close to retirement, here are some key steps to take as you assess the liquidity component of your portfolio.