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These are the times that try retirees' souls -- and those of near retirees as well.
Big drops in the stock market obviously can devastate retirement accounts. But the people most at risk are those who have just retired or who are about to retire.
That's because dipping into a shriveled nest egg can dramatically increase your chances of running out of money. The cash you take out won't be there to earn future returns when the market fully recovers; what's left would have to earn extraordinary gains to make up for the double-whammy of market losses and your withdrawals.
"It's the mathematics of compounding," explains Taylor Gang, a wealth manager with Evensky & Katz, one of the country's leading financial-planning firms. "It grows your money on the upside but shrinks it on the downside. If you have a 50% loss, you need a 100% gain to get back to the same point."
How bad can it get? Pretty bad:
- Studies by mutual fund giant T. Rowe Price (.pdf file) found that people who tap the recommended 4% of their nest eggs in the first year of retirement and who increase that withdrawal amount by 3% each year to compensate for inflation stand only an 11% chance of running out of cash before they die -- if they retire in a normal market.
- If they retire in a bear market, however, and do the same thing -- 4% initial withdrawal, adjusted thereafter for inflation -- their risk of running out of money can shoot to more than 50%.
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The first five years in retirement are critical, said Christine Fahlund, a senior financial planner for T. Rowe Price, because the average retiree has many years ahead.
If a bear market occurs in the second five-year period, "it isn't quite as bad," Fahlund says.
Time for a game plan
Here's your game plan if you're in the retirement danger zone:- Get help. Retirement calculations have too many moving parts, and the consequences of mistakes are too serious for you to go it alone. Seek advice from a fee-only financial planner who has plenty of experience with retirees. You can get referrals from the National Association of Personal Financial Advisors and the Garrett Planning Network. Mutual fund companies, including Vanguard, Fidelity and T. Rowe Price, also have advisory services, as do many brokerage firms.
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Paying for retirementYour retirement could last decades. Here are tips for living well for as long as you need.
- Don't bail on the stock market. Typical retirees need to keep at least half of their portfolios in stocks or stock mutual funds to offset inflation's effects. Keeping all of your money in so-called safe investments -- bonds, Treasurys, savings accounts, certificates of deposit or money market accounts -- ensures your purchasing power will decline over time as inflation and taxes erode your nest egg's value. Hiding in cash "is not going to work, not when you have so many years ahead of you," Fahlund says. "You simply have to have the growth" that stocks offer in the long term.
Continued: Consider delaying retirement
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