How to Have a Secure Retirement Despite a Lousy Stock Market

If you’re looking for a secure retirement, you might be sweating it. 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 taken you to the mat. This is true if you are saving money for a house or if you’re saving money for retirement.

For simplicity’s sake, let’s take the example of the people hardest hit by what’s gone on — those who are retired or about to retire.

Back to our example.

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

What to do? Your goal isn’t to retire rich at this point. Your goal is to survive.

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 it’s 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 $4,000 in the first year. In the second year, you’d withdraw $4,000 + $120 (which is 3% of $4000) for a total of $4,120, 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 McDonald’s 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 five years. This increases your odds of retirement success from 40% to 60%. I agree that it’s not enough, but it’s 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 $4,000 each year, cut it down to $3,600.

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 five years of retirement — not forever.

So how do you make up for that reduced income? You can cut your spending, work-part time, get a second job or some combination.

My main point is things rarely are as bad as they look. It’s tempting to overreact — I get that. But it’s 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.