Francis A. from Nampa, ID asks: Hi Mitch, I retired a few months ago and am now having second thoughts. Given that I have fixed income in retirement, inflation is a big concern. But my biggest concern is that in year one or two into retirement, the economy is going to go into a recession, which could put my investments at risk. I’m looking for some reassurance but also your thoughts on how I should approach these first few years. Thank you.
Mitch’s Response:
Thanks for sending in your question and congratulations on your retirement. I realize you’re not feeling great about it at this moment, but you’ve worked hard to get here so you deserve to enjoy it. Hopefully, I can provide a few thoughts to help you out with that.
I also think it’s important to note that you’re not alone in your concerns. According to a survey published earlier this year by the Society of Actuaries Research Institute’s Aging and Retirement Strategic Research Program, about 4 in 10 retirees experience an unexpected financial shock – whether in the form of a sudden down market or unforeseen expenses. Preparing for the unexpected is a key feature of any retirement plan, so the fact that you’re asking about it now is a good first step.
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At the end of the day, Francis, no one can perfectly control how their years in retirement overlap with a market cycle. Unless you have more than enough assets to provide for all of your retirement needs, that means baking in a certain amount of flexibility into your retirement plan. If you’re withdrawing 3% of your total retirement assets a year to support your living expenses, for instance, you may want to consider putting your withdrawals on hold during a recession and bear market. Retirees often need to respond to market cycles by adjusting their spending.
You also brought up inflation in your question, which is a concern for all but especially affects retirees who generally live on fixed budgets. Again, there is a certain amount of flexibility that I think is required when market conditions like high inflation present themselves. Perhaps in an inflationary environment, that means traveling a bit less than previously planned or deferring a big purchase. Acknowledging the market and economic conditions, and making adjustments in response, is again a good first step.
As for your investment portfolio, I always think it wise for people – retirees or not – to have about six to twelve months’ worth of emergency savings set aside in cash. If you have an unforeseen expense in the midst of a big market downturn, you could tap into this cash so as not to have to sell investments in a down market.
I also do not think it wise to try and anticipate what the market is going to do in the next year or two or three – for retirees, you should choose an asset allocation that aligns with your long-term goals and needs and stick with it unless those goals or needs change. This approach can be especially hard with it seems like market conditions are changing quickly. But it is important for retirees to remember that an asset allocation is designed to help you reach goals 15 or 20 years from now, not one or two years from now. Market conditions may worsen but they are also likely to improve afterward, and you do not want to be caught on the sidelines when market cycles change hands. In summary, choose an asset allocation that aligns with your retirement objectives, stick with it, and be flexible in your spending when market conditions warrant.
Consider where you will be under multiple inflation and market scenarios, and always aim for a comfortable margin of safety to avoid running out of money in retirement.
I also recommend that investors who are nearing retirement go through four steps that are outlined in our exclusive guide, “4 Steps to Managing Your Retirement Assets2.” This guide will help give you some ideas for how to transition into retirement with confidence.
If you have $500,000 or more to invest, click on the link below to get your copy of “4 Steps to Managing Your Retirement Assets.”
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