Market performance in the early years of retirement can greatly affect how long retirement funds will last, as losses can take a larger chunk out of a portfolio when it’s more flush. In an ideal world, every retiree would time their retirement to coincide with a bull market, but even during a severe downturn retirees can make their money last, contends an article in The Wall Street Journal.
The first five years of retirement are crucial for figuring out a lifestyle that can sustain you for years to come. Losses during these years can deplete a portfolio too soon, but there are steps retirees can follow to avoid that scenario, the article maintains, such as the 4% rule, which calls for dipping only 4% into your balance in year one of retirement, and adjusting each year to factor in inflation. Other steps retirees can take include:
Decrease your spending during market downturns. Overspending your portfolio while it’s also being eaten away at by market losses will shrink it faster. Leaving more money in your portfolio during a market downturn gives you more funds for when the market rises again. But current retirees should forgo inflation adjustments during years when their portfolio sees a loss, says Wade Pfau, author of the “Retirement Planning Guidebook.” For instance, a 1966 retiree who adhered to the 4% rule would have been out of money in 30 years, but if they’d decreased their spending slightly to 3.8%, they would still have most of their nest egg after 30 years.
Handle market turmoil. Most retirees have 40% to 60% in stocks in their portfolios, but studies have found that by reducing stockholdings to 20% to 30% instead, and then slowly raise their stock allocation back up to 50% to 70%, retirees have a greater probability of stretching their money out for 30 years by following the 4% spending rule. On the flip side, those who reduced stockholdings from 60% to 30% were more likely to run out of money in less than 30 years. However, the market matters: if stocks do well in those early retirement years, reducing stock exposure over time actually comes out ahead. But reducing that allocation at the start of retirement offers better protection if the market is in a downturn, Pfau told The Journal.
Utilize different assets. Instead of selling off stocks at a loss during a market decline, retirees could think about withdrawing from their whole life insurance policies or opening a home equity line of credit (HELOC) to cover living expenses, though they should take care to weigh any downsides, such as high fees, carefully, the article cautions.