When stock markets are rattled by news events, it’s unsettling for any investor — but especially so for those who are retired (or nearly there)
By Liz Weston
Published: March 21, 2020, 6:05am
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A bad stock market is unsettling for any investor. For retirees and near-retirees, though, bad markets can be dangerous. Stock market losses early in retirement can significantly increase your chances of running short of money. But there are ways to mitigate the risk. Financial planners say the following actions can help make your money last.
MAKE SURE YOU’RE PROPERLY DIVERSIFIED
When the stock market is booming, investors can be tempted to “let it ride” rather than regularly rebalancing back to a target mix of stocks, bonds and cash. Not rebalancing, though, means those investors probably have way too much of their portfolios in stocks when a downturn hits.
The right asset allocation depends on your income needs and risk tolerance, among other factors, but many financial planners recommend retirees keep a few years’ worth of withdrawals in safer investments to mitigate the urge to sell when stocks fall.
START SMALLER, OR BE WILLING TO CUT BACK
Historically, retirees could minimize the risk of running out of money by withdrawing 4 percent of their portfolios in the first year of retirement and increasing the withdrawal amount by the inflation rate each year after that. This approach, pioneered by financial planner and researcher Bill Bengen, became known as the “4 percent rule.”
Some researchers worry that the rule might not work in extended periods of low returns. One alternative is to start withdrawals at about 3 percent.
Another approach is to forgo inflation adjustments in bad years. Derek Tharp, a researcher with financial planning site Kitces.com, found that retirees could start at an initial 4.5 percent withdrawal rate if they were willing to trim their spending by 3 percent — which is equivalent to the average inflation adjustment — after years when their portfolios lost money.
PAY OFF DEBT, MAXIMIZE SOCIAL SECURITY
Reducing expenses trims the amount that retirees must take from their portfolios during bad markets. That’s why Melissa Sotudeh, a certified financial planner in Rockville, Md., recommends paying off debt before retirement.
She also suggests clients maximize Social Security checks. Benefits increase by about 5 percent to 8 percent for each year people put off starting Social Security after age 62. (Benefits max out at age 70.) The more guaranteed income people have, the less they may have to lean on their portfolios.
IF NEEDED, ARRANGE MORE GUARANTEED INCOME
Ideally, retirees would have enough guaranteed income from Social Security and pensions to cover all of their basic expenses, such as housing, food, utilities, transportation, taxes and insurance, says Wade Pfau, professor of retirement income at the American College of Financial Services. If they don’t, they may be able to create more guaranteed income using fixed annuities or reverse mortgages, says Pfau, author of “Safety-First Retirement Planning: An Integrated Approach for a Worry-Free Retirement.”
Fixed income annuities allow buyers to pay a lump sum to an insurance company, typically in exchange for monthly payments that can last a lifetime. Reverse mortgages give people age 62 and older access to their equity through lump sums, lines of credit or monthly payments, and the borrowed money doesn’t have to be paid back until the owner sells, dies or moves out.
CONSULT AN EXPERT
A survey released in 2020 by the Schwab Center for Financial Research found that among near-retirees — people within five years of retirement — 72 percent worry they’ll outlive their money and 57 percent feel overwhelmed about determining how much they can spend. Yet most people don’t consult financial planners to make sure their investment, withdrawal and Social Security claiming strategies make sense.
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