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FINANCIAL EXPERTS with “certified” in their title have plenty of good advice for retirees as they cope with today’s rough financial times. My qualifications are a little different. They’re limited to my eight decades of experience, plus my CC designation, short for Certified Curmudgeon.
What’s my advice? Say you’ve accumulated that magic $1 million nest egg and you’re following the 4% withdrawal-rate strategy. In year one, you’d pull out $40,000. In normal times, your remaining balance might grow, say, 6%, so you start the second year with $1,017,600, equal to $960,000 multiplied by 1.06. Assuming 3% inflation, your year two withdrawal would be $41,200.
But thanks to this year’s stock and bond market decline and escalating inflation, that $960,000 might instead have shrunk to $800,000 and your inflation-adjusted withdrawal in year two might have jumped to $43,000. Over time, things should get better. But right now, it’s a scary picture.
What to do? Here are three things I’ve realized over the past two turbulent years:
In recent months, I’ve been asking retirees and near retirees how confident they are about their retirement savings and income. Initially, most were very confident. The stock market turmoil hadn’t shaken them. But lately, attitudes have changed. I have been told by a few people that they may delay retirement or return to work. Several folks mentioned cutting expenses, and some said they were going to reduce their planned annual portfolio withdrawals.
Some worries about one’s financial future are unavoidable. But there may be things that you can do over a period of years to make that worry less distressing. They are simple things, but require discipline. First, try to reduce or eliminate your debt. Second, try to increase your nest egg, or at least build a small pot of cash that you can tap in an emergency (like a failed water heater or refrigerator) so that it won’t wreck your normal spending patterns. (Wrecked budgets sometimes lead to abandoned discipline. Don’t let that happen.) And third, look for ways to spend less, however small. For most of us, there are lots of ways to do that. Gradually cut down on your vices or spending weaknesses, whether it is beer, ice cream or clothing. The savings does add up. Inflation may start eating some of those savings up, but the impact will still be more manageable. You should wind up worrying less, and that has lots of value all by itself.
I’m a long-time regular reader. Spousal unit and I are both retired and in our 70’s. We both have some guaranteed income, a fair amount of cash, and an investment portfolio aimed at our eventual move to a life care facility so as not to burden our adult children. We both came from hard times—“housing and food insecurity” for one, “the projects” for the other—so we know how fragile things can be. We also know that while we did our part in saving, much else largely out of our control fell our way. I still work part-time for the joy of it and to feed my Roth😁. Present times hold no concern for us, at present.
With the excellent help and planning of one of those certified retirement advisors, we are ok in this environment because we are not dependent on the market (or cash for that matter..) for income. Our market allocation is long term (10-15 years). In our case, I would say the cash reserve is useful not to avoid selling investments in our case, but for buying when prudent to do so-currently buying some TIPs for our ladder and a few stock ETFs. I would add that following our plan with well-timed but relatively infrequent rebalancing according to established guidelines also helps.
There is a way to keep up those 4% withdrawals irrespective of how the markets operate. If that “dependable income stream” is so important to you then there is an option for you. It is a CDA. A CDA is a Contingent Deferred Annuity which is essentially an insurance policy to allow a continued “dependable income stream” for the price of a premium paid on a yearly basis that is based on a specified portfolio size. The premium is a %(say 1 or 2%) of the specified portfolio size. If the portfolio goes below a specified amount the insurance will kick in and pay you the “dependable income stream” that you have been used to. Therefore, the stock market can do what it will and you can close your eyes and keep on spending on whatever you want.
https://www.actuary.org/sites/default/files/pdf/life/Contingent_Annuities_Intro_to_NCOIL_120225.pdf
In every bear market some people find out their risk tolerance and / or the margin of error in their plan isn’t what they thought it was. However, the reason to invest in stocks is to earn the risk premium over Treasuries. But this requires a long-term investment horizon. Yes, my portfolio is down for the year, but the decline is only 1/3 of what I gained in 2021. Probably best to look at investment returns over multiple years to try and maintain an even keel.
Sequence of returns risk has become a serious concern for the first time since the Great Recession. While I’m sure some recent retirees are cutting back on their portfolio withdrawals, I can’t help but wonder how many advisors have made this recommendation to their newly retired clients.
A solid financial plan and the discipline to stick to it will never go out of style. i believe Buffett used this analogy: imagine a beach with lots of people in the water. Everyone looks good when the tide comes in, but some are naked when the tide goes out. That is what we have today, the tide has gone out.
Having gone through the last couple years of uncertainty would you now advocate for any changes in the decision process criteria to delay the claiming of social security benefits by the higher earning spouse until age 70 for those with the ability to do so? I know there are life circumstances where claiming before age 70, such as having a DAC, makes economic sense but it still appears to me that many persons are claiming using short sighted criteria and may later regret that choice. What tools and criteria do you currently recommend to people who are near or at their SS claiming age?
Like you I have now locked in my claiming decision so our claiming choices are now academic for us but helping those who have not yet claimed make an informed decision is worthy goal.
I particularity agree with your comments that many attitudes regarding spending in retirement has changed and a cash reserve is essential. I am working to add annually to my purchases of I-Bonds so those savings will eventually become my entire cash reserves when I stop active employment in a few years. I like the comfort no market risk and the rates that mirror inflation that I-Bonds provide after I satisfy the one year ownership period.
I just watched an excellent YouTube video on SS and their advice was as you said, the higher earning spouse should delay to age 70, also may increase survivor benefits.
There are so many variables I don’t see any general answer, each person and family is different in many ways. SSA.gov has lots of good info.
I think a good professional planner who can assess a families complete situation in detail would be valuable, especially when SS will represent a significant part of total retirement income,
I ran across this website calculator and it sure seems to give good advice on when to start Social Security, for both spouses.
https://opensocialsecurity.com/
Mike Piper’s calculator is a great free resource — I, too, recommend it.
Yup, I know my suggestions are pretty obvious; simple stuff, right? But the more I read, the more I interact with retirees the more it becomes obvious that too many people are unaware of the basics or simply ignore them.
Good article, Dick. I don’t think many people are necessarily unaware of basics or ignoring them.
I think for a good number of people, it’s easy to theorize best practices of withdrawal, saving, spending, etc. in a good investment climate, as we have had for 13 years, except for short downturns like March 2020. In good times, it’s always easy to imagine our best selves doing the “right” thing bad times.
It’s far more difficult to actually do the good thing in an emotional and difficult investment climate, when we actually see red across our portfolios in all asset classes for a prolonged period of time.
so your post and other like it are valuable reminders. Thank you and happy Independence Day