Liquidity Buckets and Other Strategies to Protect Boomers’ Savings

Art by Dalbert B. Vilarino

Katherine Roy, chief retirement strategist at J.P. Morgan in New York, says avoiding withdrawals from equity portfolios when markets are down is a key to protecting wealth over time.

Building sources of near- and mid-term liquidity is increasingly important for Baby Boomers, she says. The generation is the first to reach retirement age while relying heavily on individual retirement savings accounts such as 401(k)s. As such, the generation will have to manage the retirement spending journey with few guaranteed sources of income beyond Social Security.

Roy advises Baby Boomers to think about market volatility and liquidity across a multiple year timeframe, and to examine how their regular spending habits may change once they are in retirement. It is important, she says, for Baby Boomers to balance their need to access cash in the short-term while also addressing longevity risk by holding risky assets like equities. At a high level, she recommends that Boomers with sufficient means maintain up to several years’ worth of expenses in cash, so as to avoid having to make withdrawals from equity investments during potential recessions or smaller downturns.

Tina Wilson, head of investment solutions at MassMutual in Enfield, Connecticut, says the time to start thinking seriously about balancing the need for liquidity with the need for growth comes some 10 to 15 years before retirement. In fact, she recommends employees of all ages think about the subject, as there are actions one can take earlier in their career that can help solve liquidity and growth challenges farther down the line.

“Baby Boomers need to understand their overall financial wellness, and as they approach retirement, they should be seeking ways to maximize Social Security and create a sustainable income stream,” Wilson says. “Advisers and providers can help answer questions about what are the strategies that they need to deploy.”

Wilson and Roy say the Great Recession sparked deeper conversations about what is the appropriate amount of risk for near-retirement investors to carry. The answer will be different for any given Baby Boomer depending on their unique financial circumstances, but it is clear that many older investors carried excessive investment risk at the time the Great Recession struck.

“That really was a pivotal moment in the industry,” Wilson recalls. “The Great Recession showed us the importance of having proactive risk and liquidity conversations ahead of time.”

Another risk-liquidity balance consideration for older investors to keep in mind is the potential impact of required minimum distributions (RMDs) during periods of market volatility. The RMDs kick in once a participant in a 401(k) plan or individual retirement account (IRA) reaches age 70 1/2.

Roy says participants should carefully map out when to make RMD disbursements, and to avoid just holding RMDs off until the end of a given year. Simply waiting for the end of the year could result in a participant having to make a RMD withdrawal during a market dip. This is exactly what would have befallen investors making RMD withdrawals at the end of 2018.