Page 104 - Forbes - USA (February 2018)

THE INVESTMENT GUIDE

REENGINEER YOUR RETIREMENT | INCOME

Live Well While

the Market Tanks

HERE’S A SPENDING FORMULA TO PROTECT YOU IN
RETIREMENT FROM PANIC AND FROM PENURY.

BY WILLIAM BALDWIN

nail-biter for new retirees: and quit your job at age 66. If you knew historically normal multiple of earnings?
What if the next market cor- there would be no down markets and What if interest rates spike, destroying
rection arrives soon? knew you and your spouse wouldn’t a bond portfolio? If such misfortune
A Even if stocks and bonds live past 91, you could live pretty well. occurs early in a retirement lasting 30
do well over the long term, a bear You could draw out $40,000 the fi rst or 35 years, those $40,000-plus-COLA
market early on can do permanent year, give yourself annual raises to keep withdrawals will evaporate your savings.

damage to a retiree’s living standard. up with the cost of living, and be rea- There are ways to cope with these

The experts call this sequence risk. “It’s sonably assured of never running out uncertainties. Learn them and you won’t
not the average return but the timing of of money. overspend. You also won’t make the op-
the returns” that can kill you, says Dan But you don’t know how long you’ll posite mistake of living penuriously and
Keady, who oversees fi nancial planning live and you don’t know about the having regrets.
strategies at TIAA. timing of the next correction. What if The cure for sequence worries lies

Say you have $1 million in your IRA stocks retreat from their lofty level to a partly in portfolio legerdemain, partly

in psychology. If you can adapt to the
market’s vicissitudes by moving your
spending up and down, you can spend
more. If you can’t adapt, you have to be
very frugal.
“Someone who has to have a certain
amount of money every year needs to be
more conservative with the withdrawal,”
says David Blanchett, head of retirement
research at Morningstar. If you want a
very predictable income keeping pace

with inflation, and a high confi dence in
not outliving your savings, then your
draw from $1 million has to be more
like $30,000.
At the other extreme: the rare retiree
content to have an income riding up
and down as violently as the market. For
such a spender a 5% withdrawal rate is
not too lavish. But this means drawing
5% out of assets that might go down
sharply in value. The formula starts you

off at $50,000 on a $1 million account

but then, after a 40% bear market (what

we’ll get if multiples retreat to their nor- VIKTOE KOEN FOR FORBES
mal level), chops you back to $30,000.
There’s a happy middle ground be-

102 | FORBES FEBRUARY 28, 2018