Re­tirees can boost sav­ings’ life amid down­turn

San Francisco Chronicle Late Edition - - BUSINESS REPORT - By Tara Siegel Bernard

You’ve heard it be­fore: When the mar­kets be­come er­ratic, or even poised for a pro­longed down­turn, the best thing you can do is noth­ing at all.

But if you are on the cusp of re­tire­ment — or per­haps worse, newly re­tired — a tur­bu­lent stock mar­ket can make you feel par­tic­u­larly vul­ner­a­ble.

While there is some va­lid­ity to those feel­ings, it’s more pro­duc­tive to re­di­rect any panic into pru­dence, which will help en­sure your money lasts longer.

For older peo­ple in­vested in stocks, the per­for­mance of the mar­ket in the early years of your re­tire­ment can have a last­ing ef­fect on your port­fo­lio, which will re­main a dy­namic en­tity for per­haps three more decades. If you have to start sell­ing in­vest­ments when they are worth less, you’ll have to sell more shares to get the cash you need — and the reper­cus­sions build on them­selves.

“That can re­ally start dig­ging a hole in your port­fo­lio that be­comes harder to dig out of,”

said Wade Pfau, pro­fes­sor of re­tire­ment in­come at the Amer­i­can Col­lege for Fi­nan­cial Ser­vices. “It is re­ally the first 10 years of the mar­ket per­for­mance in re­tire­ment that are go­ing to drive your out­come.”

Here are some other steps re­tirees can take to lengthen the life of their sav­ings when mar­kets are less than co­op­er­a­tive: Port­fo­lio check: Re­tirees need to ask them­selves a cou­ple of key ques­tions. Is my port­fo­lio di­ver­si­fied in low-cost in­vest­ments, such as in­dex funds? Is my al­lo­ca­tion to stocks more than my stom­ach can han­dle should the mar­ket plum­met 50 per­cent, as it did in 2008 and 2009?

If you an­swer “no” to these ques­tions, you should re­assess (prefer­ably with a pro) how re­duc­ing your stock ex­po­sure might change your abil­ity to spend what you want in re­tire­ment. Mind­ful spend­ing: One of the most widely ref­er­enced rules for re­tire­ment spend­ing might be what’s known as the 4 per­cent rule. It sug­gests that re­tirees who with­drew 4 per­cent of their ini­tial re­tire­ment port­fo­lio bal­ance, and then ad­justed that dol­lar amount for in­fla­tion each year there­after, would have cre­ated a pay­check that lasted for 30 years. (The num­bers crunched by a fi­nan­cial plan­ner more than two decades ago were based on a port­fo­lio evenly split be­tween stock and bonds.)

But if your port­fo­lio value takes a sig­nif­i­cant hit, your with­drawal rate may have to in­crease to sup­port your spend­ing. If that rate starts to ap­proach 5 per­cent, and cer­tainly 6 per­cent, there’s a greater chance you’ll out­live it, Pfau warned. So ad­just­ments may be in or­der.

The sim­plest way to deal with a dip would be to hold your spend­ing steady, rather than in­creas­ing it with in­fla­tion. That ap­proach can be enough to steady your fi­nances even if your port­fo­lio were to drop by 25 per­cent from its orig­i­nal value at re­tire­ment, ac­cord­ing to Ju­dith Ward, a senior fi­nan­cial plan­ner with T. Rowe Price, based on a re­cent study. She sug­gests to keep spend­ing steady for two to four years, depend­ing on when the port­fo­lio re­bounds. Cre­ate a smoother ride: Tra­di­tion­ally, in­vestors re­duce their ex­po­sure to stocks as they ap­proach re­tire­ment. But one novel ap­proach is to cut that ex­po­sure even fur­ther — then get back into the mar­ket as you age.

This strategy, stud­ied by Pfau and Michael Kitces, direc­tor of wealth man­age­ment at Pin­na­cle Ad­vi­sory, is to in­crease your stock hold­ings over time. Port­fo­lios that started with about 20 to 40 per­cent in stocks at re­tire­ment, and then grad­u­ally in­creased to about 50 or 60 per­cent, lasted longer than those with static mixes or those that shed stocks, ac­cord­ing to their anal­y­sis. Hold a cash re­serve: If you’re ap­proach­ing re­tire­ment and wor­ried about a sig­nif­i­cant mar­ket cor­rec­tion, there’s an­other strategy that might pro­vide some peace of mind: Keep up to two years of ba­sic liv­ing ex­penses in cash to cover, say, the costs of hous­ing, food and other es­sen­tials. With that sort of buf­fer, you can try to avoid tap­ping your in­vest­ment port­fo­lio for a while, giv­ing it some time to re­cover.

Putting too much in cash, how­ever, may weaken over­all re­turns be­cause you will have less in­vested to be­gin with, and there­fore less to build on. Look for higher re­turns: This does not in­volve chas­ing af­ter some hot stock or grow­ing sec­tor. It’s far more bor­ing and coun­ter­in­tu­itive, but guar­an­teed to de­liver a higher pay­check in re­tire­ment over the long run: De­lay Social Se­cu­rity as long as you rea­son­ably can.

“The ef­fec­tive re­turn of de­lay­ing Social Se­cu­rity is much higher than what you will earn in the mar­ket to­day,” said David Blanchett, head of re­tire­ment re­search for Morn­ingstar. “It is like a 10 per­cent guar­an­teed re­turn.”

Your ben­e­fits gen­er­ally rise by 8 per­cent for each year you wait to col­lect the check beyond your “full re­tire­ment age” — that is, the age you’re el­i­gi­ble for a full ben­e­fit, which is cur­rently 66 years and 2 months for peo­ple born in 1955.

Some­one set to re­ceive a full ben­e­fit of $1,413 monthly (the av­er­age ben­e­fit amount), who in­stead waited two more years, would re­ceive roughly $1,640 — an amount that would rise with in­fla­tion — for the rest of their lives. Get help: If you doubt you have the strength to avoid temp­ta­tion and stay the course — or you want as­sis­tance de­vel­op­ing a cop­ing strategy — this is the time to seek pro­fes­sional help. It can po­ten­tially make or break your re­tire­ment.

But you need to get the right type of help, which means avoid­ing sales­peo­ple and bro­kers who call them­selves ad­vis­ers, but only get paid when they sell you some­thing. In­stead, find a cer­ti­fied fi­nan­cial plan­ner who isn’t afraid to prom­ise in writ­ing that they will act as a fidu­ciary, which is le­gal speak for putting your in­ter­ests ahead of their own.

Au­dra Mel­ton / New York Times 2018

Re­tired in­vestors can take steps to lengthen the life of their sav­ings when mar­kets are do­ing well.

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