Writing for The Wall Street Journal (3/9/20), Anne Tergesen interviewed Dr. Wade Pfau, a leading investing researcher and professor at the American College of Financial Services. For investors far from retirement, there is no need to panic but now is a good time to review your asset allocation. But for those nearing or in retirement, Pfau advises:
1. Check in with Your Accounts. are you investing enough to meet your goals? A quick reminder, using the 4% guideline, you need $1 million to be able to withdraw $40,000/year in retirement with a portfolio of 50-75% stocks. If your tolerance for risk doesn’t allow such a high % in stocks, prepare to save a lot more.
Are you appropriately diversified both across and within asset categories?
2. Go More Conservative. Research by Pfau and colleagues suggest entering retirement with 20-30% in stocks and gradually increase the % over time to 50-75%. This recommendation should serve you well to ensure your assets last 30 years even with extended bear markets. This strategy is designed to provide downside protection at the beginning of retirement when you are most vulnerable to losses.
3. Work Longer. If you haven’t invested enough, the best strategy is to work longer. If already retired, the current economy offers plenty of part-time work. Working longer, combined with delaying Social Security, is a powerful strategy for ensuring you won’t run out of money before you run out of breath. For every year you delay taking SS (up to age 70), your benefit increases 7-8%.
4. Cut Spending. For retirees who are willing to be flexible and cut their spending when investment earnings are down, you can adjust withdrawals to a 4-6% range. You recalculate the “safe” withdrawal rate each year based on the previous years growth (or loss) in your investments. To ensure you don’t run out of money you can follow the IRS’s Required Minimum Distribution table.
5. Spend from Winners. Start by setting aside 5 years of expense in cash/savings to avoid having to sell investments at a loss. A better strategy is to selectively take your living expenses from assets that have increased in value. Rebalance your assets by moving money from categories that have increased in value to assets that have lost value. This automatically results in buying low and selling high.
Source: Financial Planning for Women