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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.