Hard Lessons About Liquidity Buckets and Cash

The middle of a severe bout of market volatility is not the right time to build a bucket strategy or an annuity income stream, but times like these clearly demonstrate why such strategies are important for late-career workers and new retirees.

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While the steep drop in the markets caused by the coronavirus pandemic has given near-retirees and retirees great concern with respect to their futures, investment experts say there are strategies they can employ to shore up their portfolios.

“As we saw in the recovery from the Great Recession in 2008, it can be devastating for retirees to not participate in the recovery,” says Jeff Chang, managing director and co-founder of Cboe Vest, a financial advisory platform that delivers option-based investment protection and other products to help advisers better serve their customers. “For retirees worried about losing wealth, going to cash at the wrong time can be very damaging for long-term outcomes.”

That said, in order to be able to ride out the market’s volatility, it is important for those entering retirement or newly retired to have emergency cash already on hand, says Jim Rivers, senior vice president at Ayco, a Goldman Sachs company. This is sometimes referred to as a liquidity bucket strategy.

“To protect their investment portfolios, it is important for individuals to have enough cash on hand to get through, say, six months to a year without taking a withdrawal,” Rivers explains. “Having cash on the sidelines to weather the storm provides peace of mind and helps individuals take a longer-term view of their investments.”

Patrick Poling, managing director and senior portfolio manager at Southern Oak Wealth, agrees.

“We tell our clients who are starting to take income or about to take income that they should already have six months to a year in cash,” Poling explains. “In this downturn and circumstance, we actually think it would be best to have up to two years of liquid cash, if possible.”

While having that much cash on hand will be difficult for many people to generate, it should buy them plenty of time for everything else in the portfolio to recover in the case of a market crash. And even if one is not able to generate the full six months’ worth of expenses in cash, it could be beneficial to even have one or two months of liquid cash on hand to ride out the most severe parts of a given downturn.

“For those who are fully invested and don’t have cash, now may actually be a good time to raise a little bit of cash, because of the recent pops we’ve had in the markets that have given back some of the big losses suffered earlier this year,” Poling muses.

Ayco Senior Vice President Scott Solomon suggests the current market environment makes annuities look all the more attractive as a wealth protection strategy—though it’s probably not a great time to be an annuity shopper.

“They give a client the luxury of not having to worry as much about market fluctuations,” Solomon suggests. And when one has guarantees as part of their retirement portfolio, risk can be dialed up in other parts.

Sid Vaidya, senior vice president and U.S. wealth investment strategist at TD Wealth Management, says high-quality and diversified bond portfolios are also important to consider. They may not pay as much in returns during the good times as strategies that “stretch for yield,” but they are much more likely to hold up during periods of market stress.

“The fixed-income strategies we use are conservative and focus on high-quality instruments,” Vaidya says. “It is important to have an eye towards downside protection and liquidity. It is also important to be nimble and flexible. In this environment, we emphasize active management in particular.”

Active management can shine in this environment because companies are facing liquidity and solvency concerns.

“It is important for investors to focus on high-quality companies,” Vaidya says. “They are the ones likely to benefit and survive in the longer term. TD Wealth’s current asset allocation positioning is that we are neutral to equities, with a preference for U.S. over international equities. In fixed income, we are moderately underweight Treasuries, while moderately overweight investment grade, and neutral on high yield. We also have a recommended cash allocation of 5% that can be used opportunistically.”