Retiring in a Weak Economy

It's one of the worst things that can happen to a retiree. Just as you are about to retire or right after you retire, the market substantially declines, drastically lowering your portfolio's value. How damaging can this be to your retirement?

One study looked at the probability of a retirement portfolio lasting 30 years, based on the portfolio's performance during the first five years of retirement. The study assumed that 4% of the portfolio balance was withdrawn in the first year, with withdrawals increasing annually by 3% for inflation. The portfolio was comprised of 55% stocks and 45% bonds. If the portfolio earned between 4% and 5% annually in the first five years of retirement, there was a 74% probability that the portfolio would last for 30 years. With a return of 0% to 1% during the first five years, the probability was reduced to 50% (Source: The Wall Street Journal, June 14, 2008).

The market declines of the past couple of years, combined with decreasing housing values, have substantially reduced retirement portfolios. If you are still working, you can work longer to help overcome these lower balances. But if you are already retired or about to retire, the choices aren't as easy. Faced with that situation, consider the following tips:

• Withdraw as little as possible from your investments. If your investments have declined substantially, reevaluate your withdrawals. Withdrawing the same amount from a substantially smaller portfolio means you'll deplete the balance much sooner. At a minimum, consider freezing your withdrawal amounts and not increasing them for inflation.
• Go back to work on at least a part-time basis. By going back to work, you'll be able to reduce your withdrawals from your retirement portfolio. Even modest earnings can help.
• Set aside a cash reserve. This reserve should contain assets not tied to the stock market, totaling two to four years of retirement expenses. With the reserve in place, you'll have money for day-to-day expenses and won't be forced to sell stock investments during market declines.
• Withdraw funds in a tax-efficient manner. In general, you should consider withdrawing taxable investments first, so your tax-deferred investments can continue growing. This may also help with income tax expenses. You already paid taxes on your taxable investments, while any withdrawals from tax-deferred investments will likely be fully taxable as ordinary income.

If you would like other useful tips on how to handle declines in your retirement portfolio, please contact us.