Liz Weston* says while stock markets can be rattled by current events, there are measures that can help your retirement plan ride out volatile times.
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.
Certified financial planner Lawrence Heller uses the “bucket” strategy to avoid selling in down markets.
Heller typically has clients keep one to three years’ worth of expenses in cash, plus seven to nine years’ worth in bonds, giving them 10 years before they would have to sell any stocks.
“That should be enough time to ride out a correction,” Heller says.
Near-retirees who use target-date funds or computerised robo-advisors to invest for retirement don’t have to worry about regular rebalancing — that’s done automatically.
But they may want to consider switching to a more conservative mix if stocks make up over half of their portfolios.
Start smaller, or be willing to cut back
Historically, retirees could minimise the risk of running out of money by withdrawing 4 per cent 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 per cent 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 per cent.
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 per cent withdrawal rate if they were willing to trim their spending by 3 per cent — which is equivalent to the average inflation adjustment — after years when their portfolios lost money.
“You don’t actually cut your spending,” says certified financial planner Michael Kitces.
“You just don’t increase it for inflation.”
Pay off debt, maximise 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, recommends paying off debt before retirement.
She also suggests clients maximise the pension.
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 the pension and superannuation 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.
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.
Covering expenses with guaranteed income actually can free retirees to take more risk with their investment portfolios, which over time can give them better returns and more money to spend or leave to their kids, Pfau says.
“They’ll be able to invest more aggressively and still sleep at night because they don’t need that money to fund their day-to-day retirement expenses,” he says.
Consult an expert
A recent survey found that among near-retirees — people within five years of retirement — 72 per cent worry they’ll outlive their money and 57 per cent feel overwhelmed about determining how much they can spend.
Yet most people don’t consult financial planners to make sure their investment, withdrawal and pension claiming strategies make sense.
Getting that second opinion, preferably from a fiduciary advisor committed to your best interests, is critical.
Advisors use powerful software as well as knowledge gained from guiding many clients though retirement.
* Liz Weston is a certified financial planner and columnist at NerdWallet.
This article first appeared at www.nerdwallet.com.
