Retiring in a down market
Retirement is a phase of life that everyone looks forward to, but it can be quite scary to approach that time when your portfolio is down. Fortunately if that sentence describes you there are some steps you can talk to become more comfortable with the decision to call it quits and ride off into retirement. Creating a retirement income plan can help to insulate yourself and your portfolio when you need to access money in retirement and asset prices are decreasing. In this blog post, we'll go over some steps that you might want to consider if you're close to retirement or already there and you are worried about the market.
Have a plan
Retirement is not the time to wing it. Have a financial plan before you retire. If you don't have one, get one. Creating a retirement income plan is probably the most important step to a successful retirement. After all, you are about to eliminate your income, so the question of where you will replace it from, and how long your money will last is the most essential question you can ask yourself.
The ideal scenario in a retirement income plan is to create enough guaranteed sources of income to pay your regular bills and continue living without tapping into assets. The easiest way to describe it is that everyone has a certain amount of money coming in (Social Security, pension, rental income, etc.) every month automatically. Ideally you can comfortably live off of that amount. If you can't, you've a little work to do. If you get to retirement and you're upside down, meaning you have more going out than your current sources of income, than you've got three options. You can either draw from your portfolio to supplement you income monthly, you can lower your expenses to bring them down to the level of your income, or you can use some of your portfolio to create an additional income stream to bring your income and expenses back in line.
If you select option number one, which is just to draw from your portfolio as needed you run the risk of outliving your assets. Additionally drawing from your portfolio can have a negative impact on your lifestyle. You start thinking a little harder about doing things like going out to eat, or going to see a play when you know it will mean drawing from your retirement accounts to do it.
Likewise most folks down want to reduce their standard of living, to lower their expenses. So option number two is not exactly ideal.
The final option is one that we recommend regularly. Taking a portion of your assets, and putting it into something that will create an income stream, such as an annuity that will provide regular monthly income to help you balance the bills. The advantage here is that it can create the regular recurring income stream to meet your expenses, and save you from feeling guilty for just living your life in retirement. Using a portion of your portfolio to create an income stream is really a version of creating a private pension for yourself. If done properly it can create an income stream that you can't outlive, and will help supplement your other sources of retirement income.
Don't get too wild though!
However, don't put all your assets in something that will create an income stream. Doing something like that, while it may create a great income, can leave you lacking liquidity. You need to balance having access to funds in your portfolio with having enough income to meet your day to day expenses.
So how do you do it?
So how do you go about doing it? After looking at your sources of income and expenses, the next step is to divide up the pool of money. That's where a good Bucket plan comes into place. The bucket plan segments your money out into three different buckets: money for now, money in the bank, and growth strategy money. The money for now, that's readily accessible, is bucket number one. It's money in the bank that isn't subject to fluctuation or market volatility. Depending on your situation, sources of income and risk tolerance you would ideally have somewhere between 3 months and 2 years worth of expenses in the first bucket. That is now money that you can access it without worrying about what's going on in the stock market.
Bucket two would house income oriented assets or funds that you may need access to in the intermediate term. I won't get into all the specifics of a bucket plan here, as we have other videos, etc. about them but I didn't want to completely skip over bucket two for our purposes today.
Bucket number three is your growth strategy money. This tends to be your assets that are the most volatile but also have the most long term growth potential. It's important to have these assets, even in retirement as they can give you the most long term growth. The key is that you have them segmented into a place where you know you don't need to access them today, or even tomorrow. You want those in your plan because that gives you the growth and the upward potential over the long run because future you needs that growth. But you don't have to access that money to pay the bills at a time that is inopportune in a good plan. That money can sit there, and you can say, "okay, it's down right now, but I don't need it right now". It's similar to when you're working, and you say, here's my money in my 401(k), and it's down, but I'm not that worried about it. You don't worry about it because it's money for the future, and that's what bucket three is, even if you're already retired.
Segmenting out your assets into those buckets can help you weather the storms that are prone to pop up in markets from time to time. It can help you feel a little bit better about the way things are going because you know that you've got your sources of income coming in and going out regardless of the direction of the market.