What To Do about Retirement In a Bear Market
Stock market investors have taken a big hit in recent weeks, with recent retirees hit hardest. But there are still options on the table.
Investors have been stunned with recent portfolio losses as the Dow Jones Industrial Average has racked up eight of its worst 10 days of falls in its history, and the volatility index has soared. Even in the boom leading up to the fall, more retirees (61%) feared outliving their money more than dying (39%), according to an Allianz Life survey. The hit has been particularly hard for those planning to retire soon and recent retirees.
Sequence of Return
This is due to sequence-of-return risk, a concept which is important to understand if you're among those affected. The problem arises when a market drops substantially when an investor has just entered retirement, or right before. The base of assets which will have to last for potentially decades is substantially lowered.
For example, someone who retired in 1982 before a long market rise, and with assets divided evenly between stocks and bonds, could have safely taken out almost 10% annually for 30 years. But someone who retired in 1966, before a down market, could only draw down 4% with the same portfolio allocation over the same three decades.
"With a downturn early you get in a hole for a portfolio that it's hard to ever recover from," says Wade Pfau, a professor of retirement income at the American College of Financial Services.
Some people in the know are even pessimistic about that 4% number. Stock valuations are still elevated from a historic standpoint, and interest rates have fallen through the floor. A person retiring today can only safely withdraw 3% annually, according to Bill Bernstein, author of The Investor's Manifesto: Preparing for Prosperity, Armageddon, and Everything in Between. That means a $1 million portfolio can only safely generate $30,000 per year, adjusted for inflation annually.