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Living in Retirement in an Up and Down Market
Welcome to the good life…retirement. At least, we hope it’s turning out to be the good life. Now that you’re living off the nest egg that you worked so hard to build, you’ll probably find (if you haven’t already) that you’re taking a very different view of things from when you were collecting that regular paycheck.
No matter how well you’ve mapped out your retirement, there are challenges you can easily encounter that can put your financial welfare at risk. Living on a somewhat fixed income in a fluctuating rate environment is one of those challenges.
Many financial professionals suggest that you’ll likely need 70%-80% of your pre-retirement income, creating a comparable comfy lifestyle for 20 – 30 years. Sort of like a 30-year vacation.
Even if you do all the right things and save enough money, you could find your nest at risk with many years of retirement still staring you in the face.
Now, we’re not trying to scare you, we want to help you enjoy your retirement. So, to that end, here are some things to remember:
- Watch your portfolio closely, especially in the early years of retirement, and make adjustments to your investment mix as needed. Your financial professional can help you determine what you should be looking for and how often. He or she will also advise you as to how often you should meet together for a formal review.
- While you’re still adjusting to living on a fixed income, try to structure your income needs as tightly as possible. Translated: live cheap, if you can. It’s always tempting when staring at a giant nest egg, to blow a little in the early years. Try to resist and think long term.
- Make sure you’re comfortable with the financial professional you’re working with. You certainly don’t want to work with someone who doesn’t fully understand your goals, and if you think you need a second opinion, don’t hesitate to get one.
The Early Days of Retirement Can Set Your Stage
No matter what the markets are doing when you retire, whether they are at their peak...or not; it’s a good idea to plan your retirement income from a worst case scenario outlook.
Many retirees decided to quit working when the markets were high and interest rates were good, only to find their monthly income dwindle when the bull turned bearish.
If you know you need $4,000 per month in income, for example, make sure your portfolio can generate that income from a “low” interest rate point of view. Then, if things are booming and your portfolio is actually generating $6,000 or $7,000 per month, well good for you. If you don’t, you could find yourself dipping into your principal reducing the size of the “egg” you need to grow into the future.
Withdraw Carefully
As retirees, we can often under-estimate the lure of our money and withdraw at a higher rate than perhaps we should. If you withdraw too much too early, you risk depleting your retirement resources at the worst possible time in your life; when you’re in your seventies, with 10-15 years out of the labor market, and fewer employment prospects in sight.
A prudent withdrawal rate is probably less than you think. If you’re facing a 20- to 25-year retirement, you may consider keeping your initial withdrawal rate in the 4%-to-5% range. If you’re expecting to spend 30 or more years in retirement, you may even cut back to a 3%-4% withdrawal rate.
If you structure your portfolio properly, and if it keeps pace with inflation, you can give yourself a raise each year to make sure your income is keeping pace with prices in the economy.
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