I've been away for less than two weeks, and Wall Street has gone crazy. What's a poor retiree to do?
Well, if you're a poor retiree living on Social Security alone, then you probably don't care. Or if you have a good pension supporting you in retirement, then it probably doesn't matter much to you either. But for those us who have no pension, and who have spent a good portion of our lives saving up for retirement . . . that's all we've got!
So what happens next? Nobody knows -- not your broker at Merrill Lynch, not the expert holding forth on CNBC, nor the reassuring missive that arrives by email from Fidelity or Vanguard.
I guess we all have faith that over the long term the American economy will continue to prosper and corporate profits will grow along with it. And therefore the stock market will reward those of us who invest in it, either directly in stocks or mutual funds, or indirectly through some retirement plan. If you don't have that faith, perhaps you should be investing in Asia, or gold, or hiding your money under the mattress.
Regardless, in the meantime we should all keep plenty of cash on the sidelines. Here's the best advice I've seen on that score.
But here's the alternative I like better: Figure out how much you typically withdraw from your savings to cover the gap between your ongoing expenses and your recurring income from pensions, Social Security and anything else. Then set aside enough cash -- it can be inside or outside your IRA, it doesn't really matter -- to cover the gap for five years.
Yes, five years. That's so you don't have to sell investments when they are down. (You didn't want to be forced to sell your stocks cheap in 2008 or 2009. But you didn't want to sell them in 2010 or 2011 either, not when they were going to be worth a lot more in 2012 and 2013.)
But the amount you should keep in cash may not be as much as you think. For example, if you spend $3,000 a month, and take in $2,500 a month in pensions and Social Security, you have a $500 per month shortfall. So $500 a month for five years equals a cash balance of $30,000.
Of course this is just an example, and there's always room for adding or subtracting a little bit here and there (subtract some if you really don't have the savings; add some if you're worried about a sudden emergency expense, or a return of inflation). But you get the idea.
And besides, maybe the market will go up again next week, and all our worries will be over. I doubt it; but it could happen.