Early Intervention

Dennis Friedman, 2:41 am ET

WHEN I RETIRED, friends would ask me how I was going to celebrate my retirement. A buddy suggested I take a cruise around the world. Another friend said, “Why don’t you explore Europe?” I did neither. I wound up exploring San Diego, which is about 120 miles from my home. That’s pretty much how my early retirement went. There were no expensive vacations or large purchases.

I didn’t feel comfortable spending a lot of money when I first retired. I was concerned about the stock market tanking and putting my investment portfolio at risk. According to a Prudential study, the worst time to lose money is the five years before retirement and the five years after.

During this 10-year window, you don’t want to spend assets that have performed poorly or suffer big self-inflicted investment wounds, because your portfolio may never recover. Retirees who are largely or entirely dependent on their investments for income are especially at risk.

The reason: When retirees withdraw money from their portfolio, those withdrawals—coupled with negative investment returns—can be especially damaging early in retirement. At that point, your nest egg is typically at its largest, so bad investment returns mean big dollar losses, plus you still have many years of retirement to pay for. This is often referred to as sequence-of-return risk.

Since we can’t control how the stock market performs, here are five ways to protect yourself, especially early in retirement:

  • Spend conservatively.
  • Reduce portfolio withdrawals during bad years for the market.
  • Maintain a cash reserve equal to two or three years of retirement expenses.
  • Diversify by moving part of your stock market money into bonds.
  • Buy an income annuity to cover your fixed living costs.

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4 days ago

Start playing defense? Nah, I’ll take another route: I’m going to spend more to enjoy life while I can, collect rental income and dividends, and stick to a 100% equity and index portfolio that generates gobs of cash via writing of covered options against my positions.

The thought of spending the ‘healthiest’ part of my retirement financially cowering makes me shudder.

Last edited 4 days ago by gregorit
R Quinn
R Quinn
7 days ago

There is a school of thought that retirees spend too little in their early years and then find in later years they can’t do the things they would have enjoyed, like travel. There needs to be a reasonable balance.

I agree there needs to be cash reserves for both emergencies and down markets, but if an annuity is used to cover fixed living expenses it may not have to be 2-3 years of expenses.

I think the key is the guaranteed income stream in the form of an annuity type income.

7 days ago

Good advice, but not for everyone. You should look at your own mix of retirement accounts, non-retirement accounts, real estate, pensions, and Social Security. You might also want to consider your age at retirement, your health, and your family, if any.

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