Retirees: How to handle stock sell-offs
Joel Dresang: Dave, sometimes when there’s a lot of volatility in the stock market, especially when prices are going down, investors can get concerned about their portfolios. Your response typically is that if they have a balanced portfolio – a good mix of stocks and bonds and other investments – they don’t have to worry about short-term declines.
Dave Sandstrom: During volatile times in the stock market, Joel, a balanced portfolio will help reduce that amount of up-and-down movement in the portfolio, and it will really help an investor stick to their plan and not react to especially those downside moves where they might end up making a decision that will be a negative impact on the portfolio.
Joel: Market downturns can be particularly disconcerting for people making retirement decisions. Let’s talk about how balance can help them. First, the big decision on when to retire.
Dave: Joel, history has shown us that what’s happening in the short term in the stock market has little impact on the success of your retirement, even if you were to retire at the peak of a market.
Let’s look at three hypothetical scenarios where a retiree picked an absolute market peak to retire, which was followed by a significant sell-off. We’ll see that a 60/40 portfolio with a 4% withdrawal rate provided for them throughout their entire retirement and left a nice balance for them at the end.
- In 1973, a $1 million portfolio with a 4% withdrawal rate would have allowed that investor $3.6 million worth of withdrawals over 30 years and leaving an ending balance of $6.1 million.
- In 1987, a $1 million portfolio would have allowed that investor $2.7 million worth of withdrawals over 30 years and left a $3.6 million balance.
- More recently in 2000, a $1 million portfolio up until this point in history would have allowed $760,000 worth of withdrawals and a portfolio balance of $1.4 million.
So Joel, if we look at those three examples, even if an investor picked an absolute market peak to retire, and in these three instances they were followed by difficult times in the stock market for extended periods, that balanced portfolio with a 4% withdrawal rate worked out just fine.
Joel: And what has happened doesn’t necessarily mean it could happen again, but your point is you shouldn’t time your retirement according to the markets. What about the decision on when to take Social Security? How is that affected by the stock market?
Dave: Joel, I think some investors are tricked into being a little nervous during times of market volatility about the health of their portfolio, and sometimes they feel like they want to take that Social Security right away. There are a lot of things that go into that decision I think that are more important. For instance, your age, your long-term health, benefit levels for you and maybe a spouse. So don’t let that short-term volatility force your hand on making a bad Social Security decision.
Joel: Volatility can also intimidate retirees into maybe cutting back on their lifestyle a little more if the market’s down or reducing their withdrawal rates. What do you say to them?
Dave: Joel, I think it goes back to that good, strong, balanced portfolio. And that 4% withdrawal rate should keep you out of trouble through any type of market condition.
And keep in mind that also works to the upside. Just because we’re having fantastic stock years doesn’t mean you can suddenly spend more, because there could be a rainy day on the horizon where that 4% rate is going to be critical to cover you during those times as well.
Joel: So what I hear you say is that retirees should stick to their plans even in times of volatility, but sometimes plans can change.
Dave: They certainly can, Joel, and I think it’s important that investors remain flexible because life does throw us some curve balls once in a while. But maintaining balance and a prudent rate of withdrawal should never change, and that’s the type of thing that’s going keep us out of trouble during any type of market condition.
Having the confidence to retire, a Money Talk Video with Art Rothschild
Planning retirement via Social Security, a Money Talk Video with Lisa Lewitzke
Retirement spending: Safe rates, a Money Talk Video with Art Rothschild
Deciding which retirement accounts to tap, a Money Talk Video with Dave Sandstrom
Retirement spending with heirs in mind, a Money Talk Video with Dave Sandstrom
(initially posted December 31, 2018)
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