Smart Strategies for Making Your Money Last in Retirement
Watching your portfolio bounce around is unnerving at any age, but it’s especially tough for those who are near retirement or have just made the transition.
But relax. Although retiring into a downturn can be dangerous, “it presumes retirees just set their plans and then never change them for the next 20 or 30 years,” says David Littell, co-director of the retirement-income program at the American College. “That’s not what people do. They adjust.”
Along with adjusting your investment portfolio, modifying your budget can have a huge impact on your retirement security. "If a bear market has you worried, temporarily reducing your spending is always your best and biggest lever," says T. Rowe Price financial planner Stuart Ritter.
The good news is you're adept at making such adjustments already. "The year you replaced the roof and didn't take a vacation, or the year a child was born and you reduced spending on yourself, are examples of how we always have exhibited the ability to adjust spending when needed," Ritter says.
Stick to a safe speed
If you're on the cusp of retirement, you need to settle on a withdrawal rate that gives your portfolio a high probability of surviving for 30 years or so. Traditionally, a 4% initial withdrawal rate—with adjustments for inflation in subsequent years—was a conservative starting point. And it still is if you're willing to downshift your withdrawals after lousy years for stocks. If you don't plan to be so flexible, start at 3%. It's safer given modest expectations for investment returns.
Slow down at roadblocks
Financial planner Jonathan Guyton and computer scientist William Klinger have studied how retirees can adapt to downturns to assure they outlive their assets. A simple rule: In any year when your portfolio falls, skip your annual inflation increase. Say you tapped 4% of a $1 million nest egg in year one, or $40,000. And assume your plans called for taking $41,200 in year two. In the event of a pullback, forgo the 3% inflation adjustment and stick to $40,000.
Tap on the brakes when withdrawals are gaining speed
Say you pulled out 5% of a $1 million portfolio to generate $50,000 of income. Now assume the market fell and reduced your nest egg to $800,000. If you were to withdraw more than $50,000 the following year, that would represent at least a 6% withdrawal rate—which would be 20% greater than your original 5% strategy. Whenever market losses cause your withdrawal rate to climb 20% above original levels, reduce your income for the coming year by 10%. In this example, you would slash your withdrawal to $45,000.
While this sounds harsh, the opposite rule applies when stocks are surging, allowing you to tap 10% more income in years following big market gains. Guyton and Klinger found that retirees with a diversified portfolio (50% stocks, 40% bonds, and 10% cash) who followed all of these rules could have started out with an initial withdrawal rate as high as 4.6% and still not run out of money for 30 years.
In the big picture, these course corrections aren't that major, but they ensure that no matter how many down markets befall you in retirement, you and your portfolio will get to where you need to go.