Updated: Feb 27
Guest Blogger: Nick Naseman Iron Mountain Financial
With the market down 20% year-to-date, retirees should be re-evaluating their retirement income strategy. Have the past few days signaled the bottom, or is this just a bear-market bounce with more pain to come? Only time will tell.
Retirees who were counting on a diversified portfolio of stocks and bonds to see them through their golden years may need to make some adjustments. After the longest bull market in history, recent losses have brought reality to the forefront: The market goes up and the market goes down. But we never know which way it will move next. Sure, the market has always moved up over time and those that wait it out have always recouped their losses.
The question is, “How long can you wait until the market comes back?” If you’re still working, you may have time to wait out the down market. But if you’re near retirement or in retirement and taking withdrawals to maintain your lifestyle, do you need to adjust your spending?
Sequence of returns risk, or the order in which your portfolio experiences gains and losses, has a significant impact after you retire. Even if you average 6% or 7% per year, not every year will be positive. During down years, you’ll need to pull out a higher percentage of funds to maintain your lifestyle. That can drastically shorten how long your portfolio can sustain your spending habits.
The chart shows two 30-year income scenarios. The dotted line shows a withdrawal plan that started with positive returns and didn’t experience significant negative returns until the last three years. The solid line shows a withdrawal plan that started off with three years of negative returns in a row. Both plans started with $250,000 with $12,500 withdrawals increased by 3% each year for inflation. Both plans had a 6.6% average rate of return for the 30-year period.
As you can see, just because you experience a good average rate of return, you may still end up running out of money.
Recently, there’s been significant academic research into ways to effectively take income in retirement. When compared to conventional income strategies, this latest research reveals you can increase your income while also reducing your chances of running out of money.
As with any plan, flexibility is the key. Retirement is not a ‘Set it and forget it’ endeavor. To ensure a happy and low-stress retirement, you must be willing and able to adjust. In order to make informed adjustments, you need to periodically evaluate your plan. Current economic conditions warrant a check-up. If not now, when?
For a no-cost, no-obligation check-up, contact Nick Naseman at Nick@Iron-Mountain-Financial.com or call 719-623-7433.