Another approach is to forgo inflation adjustments in bad years. Derek Tharp, a researcher with financial planning site Kitces.com, found that retirees could start at an initial 4.5 percent withdrawal rate if they were willing to trim their spending by 3 percent — which is equivalent to the average inflation adjustment — after years when their portfolios lost money.
PAY OFF DEBT, MAXIMIZE SOCIAL SECURITY
Reducing expenses trims the amount that retirees must take from their portfolios during bad markets. That’s why Melissa Sotudeh, a certified financial planner in Rockville, Md., recommends paying off debt before retirement.
She also suggests clients maximize Social Security checks. Benefits increase by about 5 percent to 8 percent for each year people put off starting Social Security after age 62. (Benefits max out at age 70.) The more guaranteed income people have, the less they may have to lean on their portfolios.
IF NEEDED, ARRANGE MORE GUARANTEED INCOME
Ideally, retirees would have enough guaranteed income from Social Security and pensions to cover all of their basic expenses, such as housing, food, utilities, transportation, taxes and insurance, says Wade Pfau, professor of retirement income at the American College of Financial Services. If they don’t, they may be able to create more guaranteed income using fixed annuities or reverse mortgages, says Pfau, author of “Safety-First Retirement Planning: An Integrated Approach for a Worry-Free Retirement.”
Fixed income annuities allow buyers to pay a lump sum to an insurance company, typically in exchange for monthly payments that can last a lifetime. Reverse mortgages give people age 62 and older access to their equity through lump sums, lines of credit or monthly payments, and the borrowed money doesn’t have to be paid back until the owner sells, dies or moves out.
CONSULT AN EXPERT
A survey released in 2020 by the Schwab Center for Financial Research found that among near-retirees — people within five years of retirement — 72 percent worry they’ll outlive their money and 57 percent feel overwhelmed about determining how much they can spend. Yet most people don’t consult financial planners to make sure their investment, withdrawal and Social Security claiming strategies make sense.