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MAKING CENTS OUT OF THE NEWS
Blog #35
(October 27th, 2011)
Long Life to You – and Your Money!
By Tom McAllister, CFP®
It’s always puzzled me, the way financial planners, in devising retirement planning strategies for clients, tend to project withdrawal rates either in fixed dollar amounts or as an annual percentage of clients’ financial assets. I’ve seen projections using rates as high as six percent and as low as three percent, but whatever the percentage, it almost always seems to be “cast in stone.” It’s rare that I’ve I run into a flexible approach, which, in my mind, would more closely reflect both the realities of the market and the vagaries of human nature.
The years 2000-2009 serves as a good example. As the result of two ferocious bear markets during that decade, there was little growth in stock portfolios. Despite that reality, financial planning software continued to show fixed withdrawal rates. Had those withdrawals been continued while the market declined, that would almost certainly have caused a retiree or retired couple to “run out of money” sometime in their 80’s, or even in their late 70’s.
My own clients, and I suspect many of those of my colleagues, took action. They cut back spending, reduced withdrawals, traveled less, and generally behaved like rational adults, not automatons. Because those clients adjusted to reality, they were able to weather the storm and survive with decent portfolios.
A recent article in Financial Planning Magazine formalizes the common sense approach my clients instinctively followed.nts instinctively practiced, recommending to clients that they cut spending 25% in each of the three years after a bear market bottoms. In so doing, the author explains, clients can virtually ensure they will not “outlive their money.” The choice of a three year time frame for austerity following a downturn is a good one: in the ten recessions occurring prior to the year 2007, it took an average of twenty months for the for the Standard & Poor’s 500 stocks to grain their pre-recession peak..
Having worked with clients for half a century, I concede that many retirees simply cannot cut their budgets by a fourth. The next best strategy might be to take no inflation increases in years following each bear market bottom.
The absolute worst choice for investors, of course, is to switch from stocks to bonds in reaction to a bear market. Investors who “lock in” their equity losses miss the ensuing rebounds.
Far better to make adjustments now than to count on the next bull market to bail you out. The rule of thumb should be to reduce withdrawals, or at least hold them steady, until the stock market rebounds. As it looks like we may have recently hit the bottom of the bear market of 2011, now is the time to take a wise look and to cut back spending.
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