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March 01, 2008 at 07:00 PM
Historically, withdrawing 5 percent or 6 percent each year from your retirement nest egg would have worked most of the time. Unfortunately, when this failed it often failed badly leaving folks with remaining years and no remaining cash. The financial advisors have tried to address this problem by solving for the worst possible case, but these low payout withdrawal strategies mean the most likely result will be that the retiree’s kids will have a lifelong party on their graves, and sadly, even the advisor’s worse case solution will fail to protect the retiree in all situations.
Instead of using a rigid plan that forces retirees to base their lives on the possible occurrence of an unlikely event, it makes more sense to base their lives on what is likely to happen, but have contingency plans to follow if the unlikely event occurs.
Try not to retire in a down period
It is New Year’s Day 2001, the year you planned to retire, but the market has dropped over 10 percent in the last six months. Perhaps we should delay retirement and wait and see. Using the S&P 500 as a proxy for the market, if we had $100,000 and took out an inflation-adjusted $4,000 a year beginning in 2001 we only had $74,108 left by the end of 2006, but if we had delayed retirement for two years we’d be sitting with $138,000 today.
Try to spend less in a down period
The retirement statistical models all assume that withdrawal amounts increase each year, but that may not reflect reality. I have listened to hundreds of retirees over the past score of years and in general I have found they try to match their outgo to their income. If the income reflects what is happening to the principal I have seen retirees adjust to the income, and a few years of taking a little less may put a detoured retirement engine back on track.
Is everyone able to postpone retirement or tighten their belt to get thru market downturns? Of course not, but many retirees can react to these challenges, and by reacting as people instead of computer models the retirees can help maintain their retirement funds.
