Investments losses of late may be causing you a “little anxiety” these days.  (Either that or you doctor increased your meds big time). That’s right.  The stock market has not taken you to the mat.

For simplicity sake, lets take the example of the people hardest hit by what’s gone on – those who are retired or about to retire.  (Actually, the people hardest hit are the victims of Bernie Maddoff and other thieves.  That situation is very different and difficult.  I can’t address the solution for those folks here but I can tell you how you can never become one of Bernie’s victims.)

Back to our example.

Let’s say you are newly retired and as a gift the stock market just gave you a 30% haircut on your portfolio.  Yowza!

What to do?

To fully understand the options you need some background.

Smart folks have studied retirement investing for decades.  They’ve tried to discover the best way to invest in order to have the most secure retirement. To make a very long story short, it turns out that if you invest 45% of your money in bonds and 55% of your money in stocks, you have a 90% chance of never running out of money. (This is not to say that you should invest you money this way and its certainly no guarantee of future results).This study was done by T.Rowe Price, the Baltimore-based fund company and was based on withdrawing 4% of your account for 30 years and giving yourself a 3% raise each year for inflation.

So, for example, if you have $100,000 in a retirement account, you’d withdraw $4000 in the first year.  In the second year, you’d withdraw $4000 + $120  (which is 3% of $4000) for a total of $4120 and so on.  Each year your withdrawals increase.

This system works just great under normal circumstances.  But if your account values drop by 30%, your 90% “success” rate plummets to 40%.  In other words, if you continue taking those withdrawals after suffering huge losses, the chances of celebrating your 80th birthday at Mc Donalds skyrockets – and the bad news is you’ll be serving the fries….not ordering them!

Most people understand this intellectually but the problem is they don’t think it all the way through. They freak out and freeze up. They figure they’ll work forever or go live in a cave or do both.  Don’t fall into this trap.  Here are three options that change the picture entirely.

Option 1.

Delay taking your 3% cost-of-living adjustments for 5 years. This increases your odds of retirement success from 40% to 60%.  I agree that its not enough but its a move in the right direction.

Option 2.

Delay your 3% COLA increases and cut your withdrawals by 10%.  So in the example above, if you were withdrawing $4000 each year, cut it down to $3600.

Option 3.

Same as option 2 above, but rather than cut your withdrawals by 10% – give yourself a 20% reduction.  If you do this, your odds of never running out of money go up to 87% – which is just about as good as they were before the whole market mess started.

Remember that each of these options only call for cuts during the first 5 years of retirement – not forever.

So how do you make up for that reduced income?  You can either cut your spending or work-part time or a combination of the two.

My main point is things rarely are as bad as they look. Its tempting to overreact – I get that.  But its really important to examine the facts  and respond accordingly.  As in most other problems we all face, there are usually plenty of solutions.

This is just one example of how important it is to stay present. Folks who recently retired or are about to retire are the hardest hit by the financial mess.  If you aren’t in that boat, don’t you think you may have a few options too?

What have you done as a result of the market drop? Sure you may have cut your spending, but have you done so within the context of your overall plan? Or do you know somebody who has completely wigged out?  I’d love to hear from you.

Like this article? You will love getting my free brilliant financial updates! No spam, and I won't give your email address to any other person or company. That's a personal promise. Neal Frankle, Certified Financial Planner, Los Angeles, California.

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