Ask an Advisor: I’m 81, Have a Mortgage of $118K and an IRA Worth $110K. Should I Withdraw From My Investment to Pay off My Mortgage?
My retirement savings were wiped out in market changes over the last couple of years. I am planning on working for about five more years. What investment suggestions do you have this late in the game?
– Daniel
Sorry to hear that you’ve taken a hit as you enter the home stretch to retirement. I know that can be disappointing and potentially stressful. This type of scenario is why I suggest broad diversification and holding an asset allocation that fits your timeline, matches your goals and allows you to stay the course during rough markets. (If you have additional questions about investing or retirement, this tool can help match you with potential advisors.)
Potential Reasons for ‘Getting Wiped Out’
Although I don’t know how much you’ve lost, describing it as “getting wiped out” tells me it was a lot. Let’s build some context around that. If the last several years wiped you out, I imagine one of two things happened, or potentially both.
These are two common pitfalls of investing that expose you to a significant amount of unnecessary risk. (If you need help aligning your investments with your risk tolerance, consider working with a financial advisor.)
Holding a Concentrated vs. Diversified Portfolio
Ask an Advisor: How Can I Recoup My Recent Investment Losses ‘Late in the Game?’
I’m suggesting that you may have been holding a concentrated portfolio because a broadly diversified portfolio wouldn’t have wiped you out.
Let’s use the classic 60/40 portfolio as an example. This portfolio typically holds 60% of assets in equities and 40% in bonds. A diversified 60/40 portfolio had an average annual return of 6.5% for the 10-year period that ended in 2022, according to Bloomberg. This return can vary depending on what exactly you have in a 60/40 portfolio. It will also be different for other allocations such as a 50/50 or 70/30. But the basic premise remains true – the past several years didn’t wipe out broadly diversified portfolios. (A financial advisor can help you make important investment decisions such as how to spread your money across stocks, bonds and cash.)
A diversified portfolio is a good risk mitigator. Concentrated investments tend to be more volatile and expose you to specific risks that diversification can protect against. When I come across heavily concentrated holdings in new clients’ portfolios, I always point out that one squirrely CEO, one failed product launch or one blip of bad publicity could “wipe you out.”
Does holding a diversified portfolio mean you’ll always have a positive return? No. Some years are good, and some are not. The 60/40 portfolio, for example, lost about 16% in 2022. As long as you incorporate those fluctuations into your plan, though, you will have created an important risk mitigator.
Timing the Market vs. Holding the Right Asset Allocation
Ask an Advisor: How Can I Recoup My Recent Investment Losses ‘Late in the Game?’
It’s nice to think that investors could sell their holdings just before they fall, sit on the sidelines with their cash, then buy back once they expect them to start going up again. In reality, it doesn’t tend to work out that way.
Investors often time the market incorrectly. Many people who try this end up selling after their portfolio value falls and wait too late to buy back in, missing out on the upswing. That’s not because they aren’t smart. The market is simply unpredictable, and people are emotional, particularly when it comes to their money.
Make sure that your asset allocation is appropriate for you personally. That means that it’s aligned with your timeline, goals and risk tolerance. How much you allocate to stocks, bonds and cash will also depend on how much money you’ll need to withdraw and when. Having an appropriate asset allocation can help you stomach those bad years without selling and going to cash. (If you need help with your asset allocation, this tool can help you match with financial advisors.)
Next Steps
I think the best move is to identify the right asset allocation for you and hold it. This is not a magic solution that will give you huge returns. But it can give you a more consistent return that leaves less to chance, reduces risk and allows you to build an actual plan rather than hoping for exceptional investment returns to carry you.
Tips for Finding a Financial Advisor
Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
Consider a few advisors before settling on one. It’s important to make sure you find someone you trust to manage your money. As you consider your options, these are the questions you should ask an advisor to ensure you make the right choice.
Keep an emergency fund on hand in case you run into unexpected expenses. An emergency fund should be liquid — in an account that isn’t at risk of significant fluctuation like the stock market. The tradeoff is that the value of liquid cash can be eroded by inflation. But a high-interest account allows you to earn compound interest. Compare savings accounts from these banks.
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Brandon Renfro, CFP®, is a SmartAsset financial planning columnist and answers reader questions on personal finance and tax topics. Got a question you’d like answered? Email AskAnAdvisor@smartasset.com and your question may be answered in a future column.
Please note that Brandon is not a participant in the SmartAsset AMP platform, nor is he an employee of SmartAsset, and he has been compensated for this article.
