A bad stock market is unsettling for any investor. For retirees and near-retirees, though, bad markets can be dangerous. Stock market losses early in retirement can significantly increase your chances of running short of money. But there are ways to mitigate the risk. Financial planners say the following actions can help make your money last.
MAKE SURE YOU’RE PROPERLY DIVERSIFIED
When the stock market is booming, investors can be tempted to “let it ride” rather than regularly rebalancing back to a target mix of stocks, bonds and cash. Not rebalancing, though, means those investors probably have way too much of their portfolios in stocks when a downturn hits.
The right asset allocation depends on your income needs and risk tolerance, among other factors, but many financial planners recommend retirees keep a few years’ worth of withdrawals in safer investments to mitigate the urge to sell when stocks fall.
START SMALLER, OR BE WILLING TO CUT BACK
Historically, retirees could minimize the risk of running out of money by withdrawing 4 percent of their portfolios in the first year of retirement and increasing the withdrawal amount by the inflation rate each year after that. This approach, pioneered by financial planner and researcher Bill Bengen, became known as the “4 percent rule.”
Some researchers worry that the rule might not work in extended periods of low returns. One alternative is to start withdrawals at about 3 percent.