July 14, 2008

Retirement Strategies As the Stock Market Plunges

By Harriet Johnson Brackey, South Florida Sun-Sentinel

Jul. 14--If you're nearing retirement, or you have been retired for only a few years, you may already have realized this: Rocky markets are rotten for recent retirees and those about to retire.

It almost doesn't matter what your retirement plan is -- or was -- because the stock market's poor returns over the last eight months have probably changed it. The Standard & Poor's 500 index stands today 20.8 percent below its peak of last October. That means investors' nest eggs are smaller. Portfolios will produce less income, for those who need to take withdrawals during retirement.

"Hopefully we have enough for retirement, but you never know what is enough anymore," says Christine Ternenyi, 55, of Boynton Beach. Ternenyi and husband George, 56, have been diligent about saving throughout their careers. Both are pharmacists and neither expects to receive a pension. Expecting to retire at age 65 or so, she says, "It's hard to know what it's going to be like 10 years from now." Her plan: Save as much as possible.

Even in bear markets, when stocks are down 20 percent from their highs last October, people have to retire. What everyone needs to know is whether they can afford it. Here's what pre-retirees and recent retirees should consider and some strategies for adjusting your plans to declining stock market values.

Withdrawal rate key Since 1998, when a group of Trinity University professors published a paper outlining what impact withdrawals have on a diversified portfolio of stocks and bonds, many people have settled on a 4 percent withdrawal rate as being the safest.

That would mean, if you had $100,000 at the start of retirement, your first year you could take $4,000 out, then increase the amount 3 percent each year to keep up with inflation. Nine times out of 10, this would work, according to a T. Rowe Price study of thousands of possible market outcomes, for a 55 percent stock and 45 percent bond portfolio and a 30-year retirement.

But, if your portfolio in the first five years of retirement hits a bear market -- defined as stocks falling 20 percent below recent highs -- that changes everything. The T. Rowe Price study found that if your portfolio shrinks or earns less than 5 percent a year, your chances of not running out of money would be cut to less than one in two.

Those odds predict failure. The same problem would happen if you have a big expense -- the roof needs replacing or you have big medical bills -- at the same time as you're retiring.

"If these bear markets or your ill fortune with that extra expense happens two or three years in a row, it gets harder and harder to get back to where you were," said Christine Fahlund, a senior financial planner at T. Rowe Price.

Cutting your withdrawal Thrivent Financial for Lutherans, with more than $73 billion in assets under management, has worked out a Retirement Income Optimizer that produces an annual plan. It urges retirees to use a mix of investments and annuities.

Annuities are insurance contracts you can purchase that promise to pay you income for life, no matter what the stock market does. The Thrivent system adjusts how much money you should withdraw each year, based on your age and how much money you have invested.

In good years, when you have excess stock market returns, the Thrivent plan would recommend you shift extra cash into immediate annuities, to up your guaranteed payout.

In down years, the Thrivent system urges you to take out less. For example, if Thrivent's guidelines show that you can withdraw 8 percent of your assets in one year, that would be $8,000 on a $100,000 portfolio. But if the declining stock market cut your nest egg down to $94,117, the $8,000 would actually represent 8.5 percent of your portfolio.

"Don't take it," advises Mark Anema, a vice president at Thrivent. Thrivent's advisers would recommend you stick to 8 percent, which would mean a withdrawal of $7,529.

T. Rowe Price recently looked at how this all would have worked between Jan. 1, 2000, and Jan. 31, 2008. That includes the three-year bear market of 2000 through 2002, when stocks fell almost 43 percent. The conclusions: The first five years of retirement and market performance are the most critical. The best approach when times are bad was to reduce withdrawals as the bear market ends by 25 percent for five years. That would produce the best odds of not running out of money, plus a larger payout eventually.

Why? Because bear markets end. The investor who took out less has a larger nest egg that can grow when the stock market recovers. That would make possible larger withdrawals.

Put off Social Security This is an idea that goes against what you might think, says Scott Burns, who is a personal finance syndicated columnist and chief investment strategist for AssetBuilder Inc., a firm that manages about $150 million.

Burns notes that the longer you delay taking Social Security, until age 70, the more money you will eventually receive. Burns says the amount rises 8 percent for each year that you delay and then, it is adjusted for inflation each year.

You'll have to make do, perhaps by working part time.

Another plus: By not taking Social Security, you can work or take money out of your portfolio without triggering tax on Social Security benefits.

Control what you can, advises T. Rowe Price's Fahlund.

If you can't live on the smaller withdrawal, then at least stop adding the annual 3 percent to cover inflation. Or, if you haven't retired yet and you're worried about running out of money because the market has hit your portfolio hard, change your plan.

"If you don't have to retire, don't," she said. And stop making big purchases "until you see the market returning to something healthier and you see your balance is up."

Harriet Johnson Brackey can be reached at or 954-356-4614.

How close are you? To get a "ballpark estimate" of what you'll need, the American Savings Education Council has an online calculator: www.choosetosave.org/ballpark/

To figure out how much Social Security you may receive and to see the impact of delaying when you take benefits, the Social Security Administration offers several calculators at: www.socialsecurity.gov/planners/calculators.htm

Here's a calculator that allows you to see how much income you can expect from your investments and the impact of inflation: www.finance.cch.com/sohoApplets/RetirementIncome.asp

When you're ready for a detailed, sophisticated analysis of retirement, there's a Web site full of practical information: www.analyzenow.com

-- Harriet Johnson Brackey


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