September 2, 2022
If you’re considering retirement, either now or in the near future, you may be concerned about what a year of negative returns can mean for your lifestyle. The first few years can be critical to determining what is sustainable over the course of your retirement. However, research has shown that even those who retired in 2008 have done well provided they took care in managing their money. (1)
Large negative returns when your portfolio is at its largest, such as the start of retirement, can combine with withdrawals to leave your portfolio depleted. However, strategies such as reducing volatility, reducing spending somewhat, and not panicking and missing out on market recovery can help with controlling this.
A common strategy is to withdraw 4% of your account balance at the start of retirement, and increasing the amount slightly to account for inflation in subsequent years. Reducing that amount or forgoing a yearly inflation adjustment can control the effects of market declines. According to Wade Pfau, a researcher and author who studies retirement planning, “a very small change can have a dramatic effect,” and an investor who reduced their initial withdrawal from 4% to 3.8% would preserve more of their initial nest egg even in the worst historic 30-year period to retire in. (1)
Another method to control the effects of declining markets is to take steps to reduce the effect of volatility on your retirement portfolio. A 2014 study found that those who start retirement by reducing their stock exposure and choosing a more conservative strategy early on have a higher probability of making their money last through 30 years of retirement. However, if the early years of retirement are strong years for the market, a more aggressive approach early in retirement can come out ahead.
Even in a year with high inflation, where markets have been down overall, steps can be taken to control risks and reduce the impact on your retirement lifestyle. If you’ve been concerned about recent market volatility and what it might mean for your ability to retire or maintain your lifestyle, it may be a good time to reach out to a financial advisor. Feel free to contact me with any questions.