Investors have been shaking off periodic stock-market jolts as the bull marches on, but what about those planning to retire in 2018?
Soon-to-be retirees sometimes start to panic about increased market volatility in the months leading up to the end of their work lives, and that’s easy to understand because many of them have read or heard how devastating a negative sequence of returns early on can be for a portfolio.
It can be equally nerve-wracking to get too conservative now, knowing the nagging lessons about how portfolios will need to survive longer life expectancies.
“I remind clients that retirement is not a finite point in time, it’s the beginning of a 25-plus-year time horizon,” said Harold Evensky, a financial planner and president of Evensky & Katz, a Coral Gables, Florida, wealth-management firm.
For those planning to call it quits next year, here are a few steps to help steady the ship from Evensky, who works with individual clients, and Wade Pfau, a professor at the American College of Financial Services, who wrote a book aimed at do-it-yourselfers called “How Much Can I Spend in Retirement? A Guide to Investment-based Retirement Income Strategies.”
Create a bucket. Many advisers create complex bucket strategies aimed at locking up specific dollars for specific years in retirement, but that’s not what Evensky advocates. He creates a simple two-bucket approach, putting a single year’s worth of cash reserves into one bucket, with the remainder of retirement investments in the other. The cash-reserves bucket for his clients is invested in short-term bonds, but individuals could explore high-yield savings accounts as well. It helps retirees psychologically to not have to pull grocery money out of the investment portfolio, he said.
Focus on a different number. Rather than obsessing over the daily fluctuations of a 401(k) balance as work winds down, spend time verifying the future return assumptions built into an existing nest egg, Evensky said. Currently, he projects that a portfolio invested in 60 percent stocks and 40 percent bonds today will generate just 2.5 percent in real return after taxes, investment costs and inflation. If your return assumptions are too rosy, now’s the time to adjust, he said.
Be flexible.Pfau recommends that retirees stay flexible about their withdrawals from retirement accounts, because with a little flexibility, most likely retirees will be able to spend more earlier in retirement than they would if they had to commit to a spending level that won’t change in response to market conditions. He lays out several academic spending strategies from various researchers.
One example, from adviser Jonathan Guyton, involves funding a cash-reserve bucket made up of proceeds from rebalancing the portfolio, starting with an initial spending rate of 4 percent of the portfolio and adjusting for inflation thereafter. In negative return years, however, there is no inflation adjustment. And if the withdrawal rate rises by 20 percent above its initial level and life expectancy is still more than 15 years out, spending takes a 10 percent cut.
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