Q: I was planning on retiring this year, but the scholarship is making me nervous. Do you think it would be better for me to keep working until things calm down?
A: Retirement is a tricky business. Most people are eager to ditch the pressures of work for a more relaxed lifestyle, but it takes a real leap of faith to walk away from a steady paycheck, especially when a bear market is eating away at your retirement accounts. . I will answer your question in two parts. The first deals with how to handle bear markets in general; the second concerns the timing of your retirement.
Part 1: My friend Lora lives in Fairbanks, Alaska. She and her husband first moved to Alaska 20 years ago when she got her dream job as a ranger at Denali National Park. She loves the Alaskan backcountry despite its many dangers. Twice recently she was charged by grizzly bears while hunting. How did she respond? She kept her cool and held her ground. She knows you can’t outrun a grizzly and trying would only invite an all-out attack. These were bluff charges and both times the bears swerved at the last moment.
There are parallels here to dealing with bear markets. When a bear market hits you, it may feel like your world is about to end. However, if you keep your cool and hang in there, that is, maintain your investment discipline, there’s a good chance you’ll be fine. Of course, this assumes you are properly invested in a well-diversified portfolio of high-quality assets. If you have any questions or concerns about the quality of your portfolio or the way it is structured, I encourage you to consult a knowledgeable advisor.
Part 2: Financial planning for retirement focuses on three general areas: 1) Do you have enough resources to support the lifestyle you desire? 2) Do you have sufficient reserves to be able to deal with health problems that arise with age, including possible long-term care needs? and 3) What money or property do you want to bequeath to your heirs upon your death? If you haven’t made a financial plan for retirement, I encourage you to find a reputable financial planner who can help you sort out these three questions.
One of the toughest financial decisions you’ll have to make in retirement is how much you’ll withdraw from your savings each year. If you withdraw too much, you will outlive your assets. If you withdraw too little, you will have lived below your possibilities. Both results are far from optimal. Instead, financial planners try to find the middle way, what we call the “safe” or “sustainable” rate of withdrawal.
In 1994, financial advisor William Bengen published an article in the Journal of Financial Planning on safe withdrawal rates. Based on historical data beginning in 1926, Bengen observed that a person who withdrew 4% of the value of their portfolio in the first year of retirement and then withdrew that same inflation-adjusted amount each year after, would never run out of money over a 30-year period. one-year time horizon. This result held even when the retreat was followed by a crushing bear market, like the stock market crash of 1929.
Bengen’s insight was quickly embraced by industry practitioners who dubbed it the “4% rule.” Over the past 28 years, Bengen’s research has drawn widespread criticism from those who questioned his hypothesis or felt that his methodology was not rigorous enough. Yet the 4% rule persisted and became a commonly used rule of thumb – a good starting point for most discussions of safe withdrawal rates.
So in response to your question about retiring now versus waiting, I would ask if you have enough savings at current market value to support your desired retirement lifestyle if you were to follow the 4% rule from Bengen? If so, why wait? If not, what is the urgency? Either way, a good financial plan will help you approach the retirement decision with more clarity and confidence.
Steven C. Merrell is a partner at Monterey Private Wealth Inc., an independent wealth management firm in Monterey. He welcomes your questions regarding investments, taxes, retirement or estate planning. Send questions to Steve Merrell, 2340 Garden Road Suite 202, Monterey, CA 93940 or email them to [email protected]