Advice for Handling Retiring During a Financial Downturn

That warning light starts blinking when the withdrawal rate increases a certain amount — or one-fifth — above its initial rate. So if the portfolio plummets and the amount withdrawn now translates into 6 percent or more, up from 5 percent, retirees would need to cut their withdrawal dollar amount by 10 percent.

For example, consider a retiree who in the first year collects 5 percent, or $25,000, from a $500,000 portfolio. If inflation was 9 percent, the next year’s withdrawal would normally rise to $27,250. But if a guardrail was tripped — that is, if the portfolio plummeted to roughly $415,000, making that $25,000 now equivalent to a 6 percent withdrawal rate — the amount withdrawn would instead need to decline to $24,525 (or 10 percent less than $27,250).

Conversely, if the portfolio grows, causing the withdrawal rate to shrink to 4 percent, the retiree can increase the dollar amount withdrawn by 10 percent and adjust for inflation thereafter.

This rule is generally applied until the final 15 years of retirement — for example, an 85-year-old couple who want to be safe until age 100 can stop using it, as long as they aren’t concerned about how much money they want to leave to their heirs.

Check up. This is another rough rule of thumb that helps retirees figure out whether they may be withdrawing too much.

Let’s say you’re retiring at 70 and you decide you will probably need your money to last until age 95. Divide one by 25 (the number of years you need the money to last): That translates into a 4 percent withdrawal rate for that year. With a $500,000 portfolio, that’s $20,000.

But if you’re on track to pull out $30,000 that year — or 6 percent — you may want to pull back. “It’s an ongoing gut check,” Mr. Blanchett said. “Is this going to work long term? And that is a really simple way to get an answer.”

And if you don’t adjust? Just understand that you may have to make more drastic changes later.

“You are just trading money with yourself over time,” Mr. Blanchett added.

Article source: https://www.nytimes.com/2022/08/11/your-money/retiring-recession-financial-math.html