Market volatility during retirement

May 5, 2011 by · 1 Comment

In an earlier post we discussed how to cope with market volatility while investing for retirement.  The financial part of this answer is straightforward, but dealing with the emotional aspect is hard.

One of the advantages of working for a paycheck is that you’re able to buy investments from your pay. If the market goes down, then you buy more investments. As Warren Buffett says, “A short quiz: If you plan to eat hamburgers throughout your life… should you wish for higher or lower prices for beef?”

In retirement, you’re not bringing home a paycheck anymore: your assets have to supply your income. Not only that, but they have to grow so that your income rises with inflation, or you must have enough assets that you can’t outlive the principal. If the market goes down then the size of your investment portfolio usually drops with it. Even worse, your income may drop too.

In the earlier post I mentioned that spouse and I have experienced extreme volatility three times: twice while we were working and once in retirement. We survived all three in better financial condition than we started them, but the third experience had a new emotional impact that changed our views on market volatility during retirement. We’ve also had experiences with other family members that changed our perception on how to manage their finances too.

However this really isn’t about spouse & me or our investments. It’s about the different choices to be made during the “distribution” phase of managing a retirement portfolio. Talking about our portfolio is just a way to offer specific examples.

We survived the 2008-09 recession without cutting our spending. Today our retirement portfolio is back ahead of our “needs”. We’re still 20% below the ridiculous highs of 2007, but we have enough money to live our beach-bum surfer-dude lifestyle for the rest of our days. We also know that we can handle some volatility, so for now we’re staying with our four stock asset classes and we’re not investing our retirement money in bonds. Our military pensions are the equivalent of bonds, so we usually keep over 90% of our retirement portfolio in stocks.

One of the reasons we’re still so aggressive in our investing is that we reduced our expenses over the last three years– we refinanced our home mortgage and dropped our payments by over 25%. We’ll play much better defense in the next bear market. We won’t have to tap into our TSP and Roth IRAs anytime soon so they can grow tax-deferred indefinitely, helping us self-insure for long-term care. We might make our daughter a very happy heiress in 50 or 60 years, or we could give it away to charity. Or we could have one heck of a world cruise.

However since the Great Recession we also don’t hesitate to “take a little off the table”. When one of our four stock asset classes gets to be more than 25% of our portfolio, we’re selling it back down to 22% instead of seeing if it’ll shoot for 30%. If all four are heading for 25% then we might sell a little from one of the leaders to raise our cash to 10%, perhaps offsetting the capital gains by selling whatever other asset shares have lost some value. This is the equivalent of a worker doubling the size of their emergency fund in case of a layoff.

These days we don’t take any risk with our daughter’s college fund. (You’re welcome, honey!) We took substantial equity risks over 10 years ago, but as she got closer to high school her college fund moved more into cash. Today it’s in CDs, I bonds, and a few leftover 1990s EE bonds. She starts her sophomore year in a few months and we can’t mess around with that money, no matter how attractive the ZipCar IPO seems to be.

In our other generation, my father is expecting to spend the rest of his life in a long-term care facility. Those expenses average at least $75K/year and could easily rise by 10%/year. He still has pension income and long-term care insurance, but he can’t put up with much equity volatility. His retirement portfolio started 2011 at 85% stocks because he was living on his pension income and spending very little money. However this week he’s selling his Fidelity fund investments in Magellan  and International Value to put the money in CDs. Both of his investments in those funds still have losses from 2008-09 so he’ll sell some of his other stock shares to offset the mutual fund’s losses with the stock’s capital gains. Over the next year or two (while he’s receiving funds from his long-term care insurance policy), his asset allocation will drop to 50% stocks and his cash allocation will rise to 30%. When his long-term care insurance runs out in a few years, he’ll be over 50% cash and 30% bonds. He’ll be able to ride out market surprises without having to worry about permanent losses.

Again, these are just examples of our choices. During the recession many early retirees did nothing at all– their diversified stock dividends dropped a bit but they had enough cash in savings to make up for the lower dividend income. Now that the markets are rising and companies are raising their dividends again, the investors are replenishing their cash savings. A few retirees have their retirement portfolio in balanced mutual funds like Vanguard’s Wellesley.  Although the markets whipsawed both stocks and bonds, Wellesley managed to damp out the volatility and keep its distributions almost constant. Today it’s heading for new highs.

Some retirees continued to spend their portfolio income and even dipped into the principal, feeling comfortable that the market’s long-term averages would give their portfolios enough time to recover. Others cut back their spending or even thought about part-time employment.

I’m surprised at how much my attitude toward volatility has changed in the last few years. I’m still a very active investor but I did not enjoy having to look at the shrinking remains of our portfolio, let alone explain our performance to my spouse. Knowing what you have and forecasting what’s next is one thing– feeling good about it is quite different. If you’re reaching the end of your working years, then be ready for your own volatility tolerance to become more conservative. Reduce your asset allocation to stocks, or raise your allocation to cash, or even (if you’re not getting a pension) consider annuitizing a part of your income.

No matter what you decide to do, think through how you’ll feel and what you’ll want to do if your portfolio drops in value by 30%. It’ll help you get through the experience with a little less pain and a lot less panic.

If you went through the Great Recession as a retiree, how did you handle the volatility? Share your experiences in the comments. Thanks!

Related articles:
Retirement Income Redesigned: Master Plans for Distribution: An Adviser’s Guide for Funding Boomers’ Best Years
This 2006 book might be available through your local library. It’s a great series of articles on how financial advisers try to prepare their clients for retirement volatility. If you’re approaching retirement then it’ll give you more ideas on how to design your own distributions.
Asset allocation considerations for a military pension

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So where should I invest my money now?!?

May 2, 2011 by · 7 Comments

Cherie asked a very pertinent question in the TSP post:

 I joined the Navy in 2002 and contributed to TSP until I got out 5 years later. Since I have gotten out I have lost over 1/2 of the money in my TSP. Should I just leave it there and let it do its thing or should I take what is left and roll into a Roth IRA? I’m only 28 so figured that leaving it alone would be ok but just not very confident in the markets anymore and want to make sure I am doing the right thing with my money.

Thanks for your comment!

One of the world’s most frustrating things is watching an investment lose money yet not knowing where else (and “when”) you could have put it. You might not only lack the knowledge, experience, or time to do something about it– there might very well be no place left to hide from a bear market. Spouse and I know what it feels like. During the “Black Monday” of 1987 we finished the day over 20% poorer– in one freakin’ day. In 2001-02 we watched our portfolio melt down by 40% of its value like an ice cube on a Hawaii sidewalk, and nothing we did seemed to make the slightest difference. During early 2009, our portfolio was down over 50% from its 2007 highs. I did a lot of research back in 2008-09, and I know there was no place to hide.

When you left the military in 2007, your TSP was probably at an all-time high. It was certainly at least 20% above the market’s long-term performance levels, and maybe even 40% higher.

One comfort we could count on through Black Monday and 2001-02 was that we still had our military careers. We kept saving for retirement, confident that we’d be buying our next few months of investments on sale. But it was pretty nerve-wracking to retire during the summer of the 2002 market, knowing that I wouldn’t have those steady paychecks to invest anymore. It was even more exasperating watching our portfolio hit its 2009 low. Intellectually, I’d done the math and knew that we could survive. Our portfolio would recover. We wouldn’t even need to cut expenses, let alone look for jobs. But all that academic research & analysis sure didn’t make me feel better, especially the parts where I had to explain my “investor logic” to my spouse. You’re seeing the same issues in your TSP statements.

Another comfort (such as it was) during all of those times was having a plan: we’d done a lot of reading after 1987, and we’d created our asset-allocation plan. We wanted to invest as much as we could in high-quality stock funds with low expenses for at least the next 15 years, and maybe the rest of our lives. We knew that our retirement portfolio would be very volatile but that after 10-20 years its returns would probably beat the averages of bond portfolios, real estate, and commodities. Once again the problem with that research is living through a bear market’s downward volatility. (Nobody complains about a bull market’s upward volatility). It’s a terrible feeling to watch your investments lose so much value, but it’s even more painful to have to look at them while waiting for them to recover. Did you read the right books, and understand them? Was your analysis correct? Did you miss something? Did you make a math mistake? Did you choose the right decisions? Will this portfolio make money ever again?!?

Human psychology magnifies this pain. We don’t watch the market go to new highs and think “Well, it’s 30% above its long-term average, but we don’t really own any of those gains unless we cash out. Even then we’d have to pay taxes. Besides, if we cashed out then we’d have to time things absolutely perfectly, both at the top and again at the bottom, or else we’d miss out on more long-term gains. And when it goes down then it could drop 30%-40% below the long-term average for a few years, so timing is extremely hard and usually wrong. Cool. Let’s go surfing.”  Nope. If you’re like me, you’re thinking “Party!!!!” “Golly, I might be able to retire early!”  Mentally and emotionally you’ve decided that you already own that money, even though it’s still invested in a volatile asset.

When the inevitable “reversion to the mean” occurs, the new bear market almost always overdoes it and plummets below the averages for months. Again our emotional human psychology makes this far worse. We don’t think “Hey, fire sale on stocks, let’s go buy more!” Instead we mourn our recent losses  (taken from the gains that we didn’t own in the first place) and wonder if we’re ever going to see them again. A few sell out at the bottom, locking in their losses and permanently eliminating their chances to recover. We worry that we’re going to end up working until we die. Life is bleak, and now we have to figure out what else we should invest in.

The key is having a plan before the pain starts.  Most importantly, your plan has to match your personal tolerance for volatility with the market’s inevitable (and seemingly psychotic) behavior. A notorious boxer once said “Everybody has a plan until they get punched in the face.” You need a plan that you can live with while you’re trying to stay conscious and get back up off the canvas.

OK, Cherie, back to your question.

The first two things to decide are what you would do with your TSP assets and when you would do it. At age 28, it sounds like you’re planning to keep saving for retirement. It doesn’t appear that you need to tap into it now for retirement income, so you could leave it in the TSP for at least another 10 years– the “long term”.

It also doesn’t sound as if your asset allocation plan involves any exotic IRA investments. Even if you were investing in assets beyond the traditional stocks & bonds, some portion of your plan probably still includes stocks & bonds– and those portions could be handled by the TSP’s fund choices.

Your long-term goals could still include the TSP’s funds, but now you might be wondering if there’s a better mutual fund or stock or bond. The advertising of the financial industry and the investment magazines certainly makes it seem that way. However the reality is that most of a retirement portfolio’s returns depend on its overall asset allocation. About the only things investors can control are that asset allocation and its expenses.

The TSP’s funds have the world’s cheapest expense ratios.  Their returns are very close to their benchmark index, and they’re passively managed. You can get most of the market’s overall return with very little personal effort. This means you don’t have to worry about investor’s money chasing a hot manager (“inspired” by those magazine articles on “10 Great Funds to Own Now!!”), forcing him to find new investments and making it difficult for him to keep up his long-term record. You don’t have to worry whether that manager will stick to the reasons you bought the fund and stay on the job. You also don’t have to work as hard as Warren Buffett to find your own investments and keep track of their performance. You can focus on the things you’re good at– your career and saving money for retirement– and let the market’s performance return to its long-term averages. For 95% of us investors, passively managed index funds are the best approach. The TSP has the world’s largest (and cheapest) passively managed index funds.

It’s frustrating enough to lose profits (whether you “owned” them in the first place), and it’s even more frustrating when there doesn’t seem to be any place to invest the rest. Your losses over the last four years have included one of the market’s biggest rises and steepest declines since the Great Depression. Every equity fund (and quite a few bond funds) got hammered by the overall market conditions. The vast majority of investment portfolios still haven’t recovered from the 2007 highs and some may not recover for another decade.

Your only consolation may be comparing the performance of the TSP’s funds over the last nine years to the performance of other mutual funds.  After fund expenses, you probably have more money left than most of those other funds would have salvaged by having to pay higher expenses during the same bad market conditions. In other words, it could’ve been uglier and the TSP sucked less than most. But our human investor psychology means that’s not much consolation.

So where do we go from here, and how do we avoid feeling this way again?

One way is to try to change your attitude. (This is hard but worthwhile.) The “good news” is that you’ve come through one of the last century’s most intense investing crucibles. You’ve learned far more about volatility at a far younger age than my generation ever experienced. You can apply that experience in your asset allocation plan. You can decide to put up with the future extremes of volatility because you have time enough to recover before retirement. Instead of obsessing over paper losses, you can focus on the opportunity to buy discounted assets for future gains. The trick with this approach is to not panic and sell out at the bottom of the next bear market.

Another option would be to decide that you don’t want your investing life to be quite so exciting. (Unfortunately this could also make your working life longer.) If you want to reduce the extreme highs of volatility of your portfolio then make sure you’re invested in a diversified variety of assets– stocks, bonds, and CDs/money markets. If you want to reduce the long-term average volatility of your portfolio then invest in lower-volatility assets: more bonds or cash and less stocks. I’d strongly urge you to try to keep investing in a high-equity portfolio as long as you have employment income. You’ll have to find a way to cope with the emotional whiplash (“Well, I’m buying more stocks on sale this month and my portfolio will eventually recover”) but you’ll be maximizing your human capital.

So your first step is to refine your asset allocation plan. You have to find the one that works for you, not the “hot fund” approach. Think about how you’ll feel when your plan punches you in the face, and how you want to deal with those feelings. If your asset allocation plan included 70% stocks and you just don’t want to see that volatility again, then consider reducing that to 60% or even 55%. You’ll give up some long-term gains in exchange for reducing the swings of volatility. You won’t enjoy higher returns over the next decade, but you won’t see nastier drops during bear markets. Raise your asset allocations to bonds or to cash, even though those aren’t very good places to be right now. If inflation takes off (and it’s already stirring) then your bonds may underperform for another year or two. Even your CDs won’t be keeping up. But bonds won’t be oscillating as wildly as the stock market, and CDs won’t lose principal.

In the TSP you may want to reduce your holdings in the C, S, and I funds. They’re good investments to own, particularly the S & I funds, but if you don’t want the volatility roller-coaster then you should own less of them. You might want to buy more bonds in the F fund, although good bonds are just as tough to find these days as stocks. I’d stay away from the G fund– you’re still working and you don’t need to eliminate the risk of loss of principal. If you’re nervous about a layoff then put more cash in your emergency fund.

If you want to put this plan in autopilot, then put your TSP contributions in a life cycle fund.  They’re made up of the TSP’s other five funds but as you approach retirement they’re rebalanced to reduce their volatility (and their risks of loss, but also their returns). For example the L2050 fund  has a higher allocation to the C, S, and I funds, and much higher volatility, than the L2020 fund. The L2020 fund  is mostly invested in the F and G bond funds to minimize volatility and reduce the risk of loss of principal. Depending on how much volatility you want to live with, you might choose the L2030 or L2040 funds. If you’re comfortable knowing that the TSP’s L fund is rebalancing every three months, then that confidence might make you perfectly happy with the L2050 fund.

Keep an eye on the TSP’s plan to start a Roth option in 2012. You might even be able to roll your Roth IRA into the TSP, which would immediately reduce your expense ratios.

For your other tax-deferred accounts (like 401(k)s or 403(b)s), try to find the lowest-cost index funds that they have available to fit your asset allocation, and make sure you maximize your employer’s match. In your taxable accounts, seek out low-cost index funds that fit your allocation plan. These would certainly be Vanguard or perhaps Fidelity funds. They also have lifestyle funds similar to the TSP’s L funds, although with much higher expense ratios.

That’s what should work best for you, Cherie.

What are spouse and I doing in retirement, after our third experience with extreme volatility? I’ll cover that in another post.

Please do us a favor– check in occasionally with an update.  We’d like to know how this is working for you and, more importantly, what lessons you want to pass on to other investors going through the same experience. Thanks!

Related articles:
Tailor your investments to your military pay and your pension
Bogleheads.org on investment allocation
Read the first two subjects in the “Topics” box, starting with “Investment policy statement”
Recommended reading
Try “The Boglehead’s Guide to Investing”, “Work Less, Live More”, and “The Four Pillars of Investing”.  In that order.

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Asset allocation considerations for a military pension

March 21, 2011 by · 11 Comments


Here’s the first part of a three-part post to answer the nitty-gritty details of the following question:

If you’re receiving a military pension, then how should you invest the rest of your portfolio?

Frankly, to the majority of you readers, this will be a boring technical essay. The big picture of this week’s posts is that emotions will influence our investing no matter how logical we attempt to be, and a military pension lets us feel a lot better about stock-market volatility.

But if you plan to invest your savings in more than just Vanguard’s total stock market & total bond market index funds, then here we go:

There are two aspects to every financial decision– the logical and the emotional. Both aspects are equally important, and investors who make their decisions from just one aspect will find it very difficult to stick with their commitments. Investor psychology research into “loss aversion“ has shown that losing money causes far more pain than gaining it. Even if an asset-allocation plan is chosen with the most rigorous criteria and extensive analysis, the inevitable high volatility or unexpected losses will cause far more pain than the benefit of any gains. That emotion can overcome rational thinking. Investors eventually decide that the most logical and well-researched asset-allocation plan is useless if they’re not also emotionally comfortable with the results. When the markets do badly, even for a short period, distress can cause investors to sell out (and lock in their losses) at the worst possible time. This path to retirement is long and painful.

One distress-free option would be to invest in assets that have no volatility and never lose money. Treasuries, TIPS, and I bonds all attempt to offer this solution. One drawback is that these “risk-free” investments pay a very low rate of return (sometimes no return at all) and Treasuries can actually lose value to inflation.  Their low yield means that it also takes longer to save enough to support even a frugal lifestyle. When this type of a portfolio is big enough to for its returns to support retirement, it will only keep up with the Consumer Price Index (CPI).  If a retiree’s rise in personal spending exceeds the CPI then they risk outliving their assets as their personal inflation erodes their value.

A high-stress option would be to embrace volatility. Many investors spend months researching the mathematics and histories of asset allocations. They become experts on the correlated performance among different classes of stocks, bonds, real estate, commodities, and cash. The idea is that when one asset class is performing poorly, another asset class will be rising at least as quickly to offset the overall portfolio. Nobel-winning researchers have been able to “prove” that a diversified portfolio built from uncorrelated asset classes is actually less volatile than the individual assets in that portfolio.

Regrettably, the diversification “proof” only works most of the time– not all the time. As the recession of 2008-09 showed, the markets are still not efficient. Low-correlated asset classes can still drop together for days or even weeks before investors stop their panicked selling and are tempted to buy. “Portfolio insurance” methods can reduce the impact of these rare episodes, but their expense reduces the portfolio’s overall return. Spending hundreds or even thousands of dollars a year on hedging (for stock options that expire worthless) seems like wasted money during a hot bull market.

Another option, dividend investing, is a variation on a diversified portfolio of volatile assets. Investors own shares of diversified yet high-yielding stocks. They plan to receive enough dividends to live off the portfolio’s yield without ever selling any shares. This plan works well in a bull market because companies generally strive to please their shareholders by raising dividends even when their shares are growing in value. In bear markets, a company will avoid cutting its dividend when possible to keep shareholder faith (and its share price). Long-term investors can look forward to years of dividends that hopefully meet or exceed inflation while never having to worry about volatility or selling shares in a bear market.

A minor drawback to dividend stocks is that their share price tends to grow more slowly than the rest of the market because their yield is a larger part of their total return. Another issue is that it takes a larger portfolio of dividend stocks to support retirement expenses. Instead of spending principal, a dividend portfolio can only support a withdrawal rate of its total dividends– usually 2-3.5%. The portfolio never runs out of money since principal is never consumed, but it takes longer to save enough to support retirement.

Unfortunately the last recession also showed that companies will cut their dividends to avoid bankruptcy. The stocks of banks and investment firms were hit particularly hard, with some even cutting their dividends to a token penny a share. Dividend-paying stocks are an important part of a diversified portfolio, but dividend stocks should not be the only asset of a portfolio.

A final option would be to sidestep volatility and render it irrelevant. It requires having enough in cash (money markets and CDs) to support living expenses during a bear market. Retirees live off their pension and their cash while they wait for the bear market to end and their assets to recover. A two-year cash buffer (as much as 10% of a portfolio) works well for all but the longest bear markets. Although investors can ignore downward volatility for months or even years while they’re spending the cash, the emotional impact can still be severe enough to make them question the wisdom of this asset allocation.

Most investors choose a middle ground among the various investing options. They invest in assets paying dividends as well as those whose returns are expected to beat inflation. Diversified portfolios assume risk with volatile assets, but the assets are split among several classes to (hopefully) reduce overall volatility.  Part of the portfolio is also kept in cash to support living expenses during bear markets. The asset allocation allows investors (and their spouses!) to enjoy a good night’s sleep.

Even with this accumulated wisdom, investors are still trying to put stock-market meltdowns in perspective. It’s painful to watch equity portfolios go into free fall and temporarily lose 50% of their value, even if diversification minimizes the paper losses. It’s a great opportunity to rebalance by buying more shares at a discount. The portfolio’s cash allocation provides the spending money to ride out a bear market while waiting for the rest of the assets to recover. But the emotional depths of a bear market can still make even the most dedicated investors question their logic and their discipline.

Next post: “human capital” and the asset-allocation value of a military pension.

Related articles:
“Present value” estimate of a military pension
Saving base pay and promotion raises
Military pension inflation protection
Tailor your investments to your military pay and your pension
Where to put your savings while you’re in the military

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Tailor your investments to your military pay and your pension

December 30, 2010 by · 14 Comments

 

Moshe Milevsky’s book “Are You a Stock or a Bond?” suggests that military on active duty can invest much more aggressively than many civilians. Milevsky’s concept of “human capital” grew out of his studies of investment and retirement plans. He noted that every worker has the lifetime potential to earn different amounts of money, with varying degrees of reliability and predictability, depending on their potential occupations. Some careers had a high degree of continuous employment and steady income. Civil servants and university professors could all be expected to have relatively steady jobs which, while not paying large salaries, would earn a decent income with good retirement benefits. The modest yet predictable nature of their income was like a bond.

Other occupations, like Wall Street financier or professional sports, could generate huge payoffs in bonuses or options– but their likelihood of employment and the reliability of their income could be volatile. They could be laid off during any recession or a single injury could end their career. Although they would probably earn a much bigger total than more steadily-employed professions, their income was not predictable and they might even have to arrange for their own retirements with tax-deferred savings and annuities. The wild swings of their employment and their income resembled a penny stock.

A military member’s “human capital” has the potential to earn millions of dollars over the years between school and retirement. With every paycheck their years of training, skills, and experience are converted to investment dollars plus retirement and healthcare benefits. Even in a combat zone their pay, benefits, and insurance rise to cover the higher possibility of injury or death.  The military’s reliable predictability of employment is the equivalent of a steady stream of high-quality income. It’s as good as a portfolio of government bonds.

When you’re on active duty you’ll enjoy a steady stream of largely predictable income. According to Milevsky, the asset allocation of your investment portfolio can shift to stocks because your human capital already resembles bonds. You’ll still need an emergency fund and you’ll still want to save for specific goals like buying a home, but you don’t need to allocate much money to low-volatility assets like bonds or Treasuries or CDs. As long as you’re on active duty or drilling for Reserves/National Guard pay then you can take extra risks with your investments for an extra 1% of returns.

If you’re saving military paychecks for retirement, or if you’re retired on a military pension, then you can take extra investing risks! The income stream of your pension is based on one of the world’s highest-quality annuities resembling a portfolio of inflation-adjusted bonds or Treasuries. If you had to buy these bonds to produce the income stream of your pension, it’s possible that their value would be greater the rest of your savings. In that case the majority of your overall investment portfolio, including both your pension and your other assets, would be its bond component. Offset that bond allocation by investing the rest of your portfolio in larger portions of equities and real estate. The compounded extra return over 20 years will greatly increase your portfolio and speed your retirement.

The challenge of this financial analysis is its emotional turbulence. While your high-equity portfolio will earn a greater long-term return, it has much higher short-term volatility. If you can sleep at night despite a -25% year once a decade, and if you don’t need to convert the assets to cash within five years, then you could invest more aggressively. You could rely on the bond-like income stream of your paycheck or retirement benefits while raising your asset allocation in stocks, including small-cap and international equities, to enjoy greater returns.

If you find that an occasional 25% loss causes you enough emotional stress to consider abandoning your strategy at the worst possible time (despite its long-term rewards) then reduce your asset allocation of equities until the volatility is low enough to live with. Everyone swears that they’re able to tolerate a high degree of investment volatility, but that’s generally only true during a bull market. No one enjoys downward volatility, and selling equities at the bottom of a bear market will quickly wipe out those earlier years of extra gains.

If you’ve used your Reserve/National Guard career to reach retirement with a smaller pension, or if you retired with no pension at all, then consider using a portion of your savings to buy a no-frills annuity that provides a small percentage of your retirement income. (Milevsky’s book has more details on the types of annuities and their expenses.) Annuities earned a (deservedly) bad reputation in the 1990s for their high sales commissions and expenses, but even Milevsky has been impressed by their recent improvements. Insurers have learned a lot about estimating their annuity risk, too, and their products are more likely to be backed by a strong company with adequate assets. An annuity isn’t as highly guaranteed as a military pension, but your retirement annuity can support a “basic necessity” lifestyle. Keeping a few years’ expenses in money markets and CDs will allow you to ride out the worst of a bear market’s volatility while remaining confident that your overall portfolio has the resiliency (and the time) to recover from the inevitable financial roller-coaster.

Related articles:

Retiring on multiple streams of income
Retiring from the Reserves and National Guard
Retiring without a military pension

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