The combination can be unnerving: Inflation at a 40-year high, Russia invades Ukraine, oil tops $100 a barrel, and the stock market continues to fluctuate.
What is the best way for retirees and those contemplating retirement to think about their spending, investments, and spending down from the money they have saved and invested for so many years?
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For those who have a pension and Social Security — essentially guaranteed sources of income to cover their fixed expenses — the ups and downs of the market are less worrisome. For those who plan to or are already spending down their assets to cover their monthly expenses, a volatile market can induce fear. How much can I spend? Will I run out of money? Should I work longer? Should I look for a “retirement” job?
Each individual’s or couple’s situation is different yet there are some guiding principles for dealing with market volatility in retirement or when considering retirement.
“Market volatility is part of investing,” says Rob Williams, director of financial planning and retirement income at the Schwab Center for Financial Research. “It depends if you prepare for it in advance.”
That said, how prepared people are varies.
Overall, the timing of your retirement does, indeed, matter. “Market declines right around when you retire are a concern,” says Roger Young, vice president and senior retirement insights manager at T. Rowe Price. Yet, because retirement can be a “very long time,” 30 years or longer, he says, “some of the money is still long-term money.” In a 30-year retirement, you won’t touch it for 15 years. “Avoid overreacting.” A large amount of the money is for the future, and, hopefully, you have some cash and bonds, to see you through the volatile times.
For those who have planned well — they have a balanced portfolio and a cash cushion — the fears are likely mild, minimal, or nonexistent. For the rest, the best strategy is to avoid impulsivity, says Daniel Lee, director of financial planning and advice at BrightPlan, a financial wellness benefit provider based in San Jose, Calif.
For example, when the market dropped close to 30% in March of 2020, at the beginning of the pandemic, some people panicked. “They sold everything,” Lee says. “In 2020, say you had $1 million in a 401(k) and it dropped 30%. If you sold, you had $700,000. “It was a $300,000 mistake,” he says. In this case, “they were retired and in their 60s. You just hear that all the time,” he says.
For the past decade, the market has been strong, generating double-digit gains for many. Some were aggressively invested, 100% in stocks, for example, “trying to squeeze every little bit out of stock market returns, ahead of a down market,” Lee says. “And they don’t have any cash on hand.”
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That situation can lead to panic. Yet, even those with guaranteed retirement income — Social Security, a pension, annuities — “don’t like seeing their portfolio drop,” Lee says.
Situations vary. “There are clients who are never going to run out of money,” T. Rowe Price’s Young says. “Others are closer to the edge.”
“People tend to take a cautious approach to retirement,” he says. “They will make adjustments during the first few years of retirement.”
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If you are retired or thinking about retiring, here’s what financial experts advise during a volatile market:
Calculate your essential versus discretionary expenses. Aim to cover your essential expenses — housing, transportation, utilities, groceries, health insurance and medical expenses, phone bill — with guaranteed sources of income. For retirees, those include a pension, if you have one or more, Social Security retirement benefits, and, possibly, one or more annuities.
Ideally, you can more than pay for the basics with these resources.
Use your cash reserves. Some who anticipated volatility or an eventual downturn created a cash reserve in addition to their rainy day/emergency funds. Rather than sell stocks that have decreased in value, now is the time to turn to cash reserves. “If you can fund your lifestyle without dipping into stocks too much,” Young says, you’re in a better situation than if you are dependent on spending down invested assets for your fixed expenses.
Cut back on spending. Research shows that retiree spending declines annually by 2%, and varies by wealth, according to a T. Rowe Price March 2021 report, “Decoding Retiree Spending: A better understanding of spending patterns may transform retirement income solutions” by Sudipto Banerjee, Ph.D. vice president, retirement thought leadership at T. Rowe Price. Further, “people are flexible about their spending and adjust it to match their income so that they can avoid drawing down their assets,” the report said. “Retirees typically choose to adjust their nondiscretionary spending (often considered fixed spending) to match their guaranteed income, challenging the notion that these expenses are truly fixed.”
Work longer. If you’ve already left your career work, find another source of income to bolster income for your essential expenses. If you are considering retirement in 2021, postpone it for a year. “Think of waiting one additional year to retire,” Young says, “or, get more serious about a side income.”
Avoid selling stocks. “If you’re thinking about retirement, hold off on taking money out of stocks,” Young says. Since the market has done well over the past decade, hopefully you “put some money in a cushion, and can use it now.” If you have to sell, Williams says, “avoid selling depreciated stocks.”
Reduce your withdrawals. If you have been steadily drawing down from your portfolio in retirement, reconsider the amount you withdraw.
“Reducing the sale of your investments is what we recommend,” says Williams. “Delay the sale of any stocks. Tap bonds first. Blindly continuing to sell (stocks) when they’ve fallen in value — that can put your investments at risk.” If you are spending down from your portfolio, aim to minimize the amount. “Reducing your withdrawals a little bit can make a big difference,” he says. “Don’t give yourself an inflation increase.”
View volatility as a wake-up call. Whether you are still working or receiving Social Security retirement benefits, and are able to save some of the money, create a financial cushion. “This is a wake-up call. Have those reserves,” Williams says.
Stay the course. Markets recover, and how quickly they do varies historically. “If you have the time to wait for the market to come back,” Young says, “if you can avoid rash decisions and think about other levers to pull, that can help you long term.”
Harriet Edleson is author of the book, “12 Ways to Retire on Less: Planning an Affordable Future.” A former staff writer/editor/producer for AARP, she writes for The Washington Post Real Estate section.