Near Retirees Get the Best of Both Worlds

May 13, 2024

As we advance through our careers and begin to near retirement, our retirement savings should start changing its nature. Younger people who still have a long time to wait should remain invested heavily in higher-risk and higher-return assets. Those of us that are nearing retirement should begin to remove some of that risk and focus more on playing defense.

What does playing defense look like, exactly? Why does that matter? And how can you go about engaging in a defensive strategy? And why is it one of the best times in recent history to be rotating from higher risk assets to a less volatile portfolio?

Introducing defense is pretty simple really. Take your risk-exposed assets and move some (or all) of them into investments that offer much more safety. A great example would be rotating funds from a stock-based mutual fund to a money market account. Stocks are historically volatile…meaning they have moved in large percentages in a relatively short amount of time. Money market funds historically have been much more stable, offering much greater safety of your dollars.

Why would we need to do such a thing? Well, let’s take a look at the S&P 500 during the Great Recession of 2008 to answer that. The index dropped 48% from its all-time highs (CNBC, 2024). If you were invested in something approximating the S&P, you’d have lost over half your value. That’s not a disaster for younger folks. In fact, it presented an amazing buying opportunity.

But what if you were planning on retiring in 2008 or 2009 and needed your wealth to live off of? The market didn’t fully recover from that crash until 2012. All the budgeting and work you did to be able to retire would come crashing down around you. Many Americans simply cannot afford to retire if their nest egg were cut in half. This is why you need to focus more on defensive investing as you near retirement. Protecting your wealth from extreme drops becomes critically important. You may not be able to endure a market crisis and support your retirement dream.

There is good news for you folks! All three major stock indexes are near record highs. After a swoon in 2022, the Dow Jones Industrial Average, the NASDAQ 100, and the S&P 500 have all climbed significantly. While April wasn’t as kind as the previous 6 months, the market is still near its all-time highs.

Added to that, interest rates remain at very attractive levels. Traditional defensive investments like bonds, CD’s, money markets, and fixed annuities all offer returns that, on average, are higher than they’ve been for 20 years. This set of circumstances doesn’t happen often. 2007 was the last time the Federal Funds rate was above 5% (MacroTrends Federal Funds Rate - 62 Year Historical Chart, 2024). As many defensive investments trend similar to that rate, CD’s, annuities, and bonds were also in an excellent position then. The stock market was also touching record highs that year. In short, we haven’t seen circumstances like this for 18 years.

If you need to get more defensive, this is a unique opportunity to capitalize on excellent stock market gains you may have earned and get great returns on defensive investments. You can have your cake and eat it too. If you’re unsure, talk to a trusted financial advisor and ask if this is a good time for you to start playing it safe.

As always this and many other informative articles can be found at our website, in our blog section. You can also check out our social media for links to many of them.

Stock investing includes risks, including fluctuating prices and loss of principal.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.