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New York Times
04-04-2025
- Business
- New York Times
How to Protect Your Retirement Savings Now as Markets Plunge
'Stay the course.' 'Tune out the noise.' 'Focus on the long term.' That's the advice that experts typically play on repeat at times like these, when stock prices are volatile or falling — as they did Thursday, when the S&P 500 dropped nearly 5 percent, its worst decline since the pandemic in 2020. It is wise counsel for most people, since no one knows for sure which way the market or the economy will end up this year, and missing out on stock gains, even briefly, can put a big dent in your retirement savings. What's more, over periods of 10 to 20 years or more, stocks have always bounced back handily after downturns, leaving investors who remained steadfast with far bigger balances than they had before the turmoil. But what if you don't have a decade or more to wait out a recovery? For anyone who intends to leave the work force in the next few years or who has recently retired, the current financial environment is perilous. If you're still working, a recession could push you out of a job earlier than planned, cutting short the time you have left to save and extending the period you need those savings to last. And for both near and recent retirees, a big drop in stock prices increases the risk you'll eventually run out of savings. 'What happens to the market and the economy in those near and early retirement years matters disproportionately to the success of your entire retirement plan,' said Wade Pfau, a professor at the American College of Financial Services and author of 'Retirement Planning Guidebook.' That's why financial experts often refer to this period — roughly the five years before or after you stop working — as the retirement danger zone, and urge people in it to be proactive about reducing their risks. Here are five steps they recommend taking now. Build a Cash Cushion When stock prices drop just as you start withdrawing funds to cover expenses, you have to sell more shares to meet the same spending needs. That leaves less money to grow back once the market recovers. 'It can dig a hole where your retirement account just can't catch up anymore,' Dr. Pfau said. Consider two new retirees with $1 million in savings. Both start withdrawing 4 percent a year (and then adjust for inflation) to help cover their bills during retirement, and while gains and losses vary from year to year, both on average earn 5 percent annually on their investments. The only difference: Retiree A has her best year, a 20 percent gain, in Year 1, while Retiree B has his worst year, a 20 percent loss, at the start. The upshot? After 30 years, Retiree A has more money than when she started, a cool $1.6 million, according to an analysis by J.P. Morgan Asset Management. Retiree B, with far fewer dollars available to grow over time, runs out of money after about 22 years. To avoid Retiree B's fate, financial advisers suggest moving enough money into stable cash investments such as money market funds and short-term Treasury securities to cover how much you'll need to pull from savings in the first two to three years of retirement. Since you can't predict the best time to sell, gradually shift the amount you'll need from stocks to cash in equal installments over the next several months, advised Mark Whitaker, founder of Retirement Advice, a financial planning firm in Provo, Utah. It's also a good idea to identify other sources of income you could tap if needed, such as annuities, a home equity line of credit or even a reverse mortgage if you have substantial equity in your house. An added benefit to this strategy: 'It helps people disconnect emotionally from what is happening with the market,' Mr. Whitaker said. 'It's like, OK, the money I need to live on initially is protected and my retirement plan is not contingent on what the S&P does this year.' Fix Your Mix (a Little) You can also dampen the risk of losses in your retirement account by shifting more of your assets into bonds, which historically have lost far less money than stocks during downturns. That's especially important if you haven't rebalanced your investment mix after the sharp gains of 2023 and 2024, when the S&P 500 rose 26 percent and 25 percent. You might aim to have enough money in bonds and cash to cover how much you need to withdraw from investments for five to seven years in retirement, suggested financial planner Clint Haynes, a retirement transition specialist in Lee's Summit, Mo., and author of the book 'Retirement the Right Way.' Don't go overboard, though, he cautioned. You still need to keep a substantial percentage of savings in stocks — perhaps 50 to 70 percent — to combat the other big financial risk for retirees: inflation. Over time, only stocks have been able to handily outpace rising consumer prices, increasing an average 10 percent a year historically, which is more than double the gains of bonds and real estate and triple the return on cash investments. 'Inflation is a low drip, like boiling a frog: The impact kind of creeps up on you, but when it hits, it doesn't feel good,' Mr. Haynes said. Don't fool yourself into thinking you can bail out of stocks now, then jump back in when the market stabilizes. Gains historically have come in unpredictable spurts, and the biggest advances often come within days of the worst declines. If you missed the 10 best days over the 20 years from 2005 to 2024, you would have reduced your returns by more than 40 percent, according to J.P. Morgan; if you missed 30 of the best days out of the roughly 5,000 trading days during that period, you'd have lost money, after inflation. Adjust Your Spending Reducing your spending, even temporarily, will also help your money last. If you're still working, every dollar you don't spend is one you can direct toward saving, to be better prepared if a recession or bear market hits. And if you're already retired, every dollar you don't spend is one dollar fewer you need to pull from savings when stock prices may be down. Look at your discretionary spending and see where you can make a few strategic cuts. 'If you budgeted $5,000 or $10,000 for travel, maybe this isn't the time for a big trip, or if you're gifting to the kids or grandchildren, pull back a bit,' said Lazetta Rainey Braxton, a financial planner and founder of the Real Wealth Coterie in New Haven, Conn. Or take a more systematic approach. Instead of following the standard guidance to keep withdrawals to 4 percent of the balance in your retirement account, then adjust annually for inflation, you might forgo the inflation raise when stock prices are falling, Dr. Pfau said. Or you can install so-called guardrails, limiting withdrawals to, say, 3 percent in bad years for stocks but taking out, perhaps, 5 percent when the market is surging. Have a Plan B — and C Taking action and being flexible in response to economic conditions can also help with the emotional toll of worrying about your money in the early years of retirement, said Teresa Amabile, a psychologist and professor emerita at the Harvard Business School and co-author of the book 'Retiring: Creating a Life That Works for You.' 'Facing these uncertain markets and an uncertain economy, you can't help but feel some anxiety, but our research found that exercising agency in making changes and practicing adaptability to unforeseen circumstances can help allay those concerns,' Dr. Amabile said. One helpful exercise, Dr. Amabile said: Think through three different options for your lifestyle in retirement — your ideal, a scaled-down version that might be more realistic financially and an even less costly option if economic conditions leave you feeling squeezed. Maybe, for instance, you hoped to buy a second home in a warm location to escape to during the winter months. A scaled-back version might be renting a beach house instead for a month or two during the cold weather; a third version might be taking a shorter winter vacation or even downsizing to a smaller home to free up cash for travel. 'Plan scenarios that are all appealing,' Dr. Amabile said. 'Realizing that you have a variety of enjoyable options is what's key.' Work a Little Longer If you're still working, putting off your exit date for a while will give you more time to save and shorten the number of years those savings have to last. 'Working longer is a really powerful way to improve your retirement finances and get a spending plan back on track,' Dr. Pfau said. Already retired? You may still be able to postpone withdrawals from your savings, or at least take less money out, by finding a part-time job to supplement income from pensions or Social Security. Of course, continuing to work isn't an option if, for instance, you're retiring because of health problems or you were laid off and can't find another job. Or you may simply be reluctant to change your schedule for a retirement you've worked and planned hard over decades to enjoy. 'Time is a currency, too, and it's important to think about all of the trade-offs,' Ms. Braxton said. 'Are you willing to give up on the things you wanted to do in your robust years without the pressure of an alarm clock? Because you never know what can happen, especially with your health.' Rather than continuing to work, you might consider downsizing or cutting expenses more than you planned because the trade-off is worth it to you, Ms. Braxton said. 'The clearer you are about your vision for the life you want in retirement, and the reality of the financial options, the better your chances of getting to a place where it all works out.'
Yahoo
18-03-2025
- Business
- Yahoo
How to determine if you're financially ready for retirement
Listen and subscribe to Decoding Retirement on Apple Podcasts, Spotify, or wherever you find your favorite podcasts. Are you on track financially to retire? How might you go about figuring out whether you'll have enough income to support your desired standard of living in retirement? According to Wade Pfau, author of the "Retirement Planning Guidebook," the best way to determine your financial readiness for retirement is with a three-step framework, which he shared in a new episode of Decoding Retirement (see video above or listen below). This embedded content is not available in your region. Step one involves quantifying financial goals using "the four Ls" that translate into retirement expenses: longevity, lifestyle, legacy, and liquidity. 'This is really what you're seeking to fund in retirement,' Pfau said. The second step is to assess available assets for retirement, including Social Security, investment assets, home equity, potential part-time work, and other future income streams to fund your liabilities and your future expenses. Step three involves calculating the funded ratio — the ratio of your assets to your expenses — using a relatively conservative rate of return. 'I think that's really the best starting point for thinking about, 'Am I on track to being able to successfully cover my retirement expenses?'' Pfau said. Read more: Retirement planning: A step-by-step guide The funded ratio metric resembles how government and corporate pension plans assess their financial health, determining whether they have enough assets to meet the pension benefits promised to retirees and workers. According to Pfau, a funded ratio of 100% or above suggests you're in good shape. If your funded ratio is below 100%, however, you have several options to improve it. "You need to either increase your asset base, which implies potentially working longer, or you need to decrease your retirement liabilities, which just means cutting expenses," he said. "Whether that's just trimming some of the discretionary expenses or maybe reducing the legacy goal, just reducing what you're trying to fund helps to get the funded ratio in alignment." Another option is to assume a higher investment return, but Pfau warned that this is a risky approach. "If you're assuming you're going to earn a higher investment return and use a higher interest rate to calculate your funded ratio, that can make your plan look more funded," he said, "but it would correspond to a lower probability of success because there's less chance that you're going to outperform that return assumption that you're using." Ultimately, a solid retirement plan is built on realistic assumptions, Pfau said. He added it's also important to remember that your funded ratio will fluctuate over time as market conditions change. "Your funded ratio would fluctuate on a daily basis as the value of your investment accounts fluctuate," he said. While the goal is to outperform your assumed rate of return over the long run, monitoring your funded ratio regularly is key. If your funded ratio improves, "it might even point to spending a bit more," Pfau suggested. On the other hand, if market losses cause your funded ratio to decline, "then you might want to revisit whether you need to reduce expenditures to help get that funded ratio back into alignment." Read more: Here's what to do with your retirement savings in a market sell-off So, how might you go about estimating your retirement expenses? In general, in the five to 10 years before retirement, people typically start to understand the cost of maintaining their lifestyle, which serves as a strong foundation for their planning. 'Of course, there's a lot of things that can change in retirement, but certainly the pre-retirement expenses that you have are going to be the most useful for figuring out what that might translate into post-retirement,' Pfau said. When deciding how to fund the four Ls, Pfau explained that retirement assets can be categorized into three groups. Reliable income assets are best suited to cover your core, fixed costs that need to be met regardless of how long you live. Ideally, Pfau said, these assets offer lifetime or contractual protection to ensure financial stability throughout retirement. Read more: What is the retirement age for Social Security, 401(k), and IRA withdrawals? A diversified portfolio, consisting of investments designed to balance market growth and a risk-adjusted return, is typically allocated toward discretionary lifestyle goals and, potentially, legacy planning, Pfau said. And once you've covered essential spending, longevity, lifestyle, and legacy needs, Pfau said any remaining reserves can be set aside to handle unexpected expenses in retirement. These resources might include home equity, surplus investment assets, or insurance policies. Though common rules of thumb can offer a simple starting point, Pfau cautioned against relying too heavily on them. He argued the 70%-80% guideline for replacing income in retirement has its limitations, such as assuming a stable income. 'That rule of thumb starts falling apart because it's 70% or 80% of what?' he asked. 'It's really implicitly assuming you always have the same salary' when, in reality, salaries fluctuate. Pfau acknowledged that 'the basic idea makes sense' for those who consistently spend most of their income. However, 'in practical terms, you're probably better off spending the time figuring out what your budget is and then using that as that baseline for figuring out whether you're potentially able to fund that in retirement,' he said. In addition to saving, planning for retirement is about managing various risks, and longevity risk is one of the most critical. 'It's great to live a long time,' Pfau said. 'It's just financially more expensive.' If, for instance, you retire in your 60s with a life expectancy in your 80s, 'there's a 50% chance to live beyond your life expectancy,' he said. And this uncertainty raises key questions: 'What if I outlive my assets?' he asked. 'What if I have to plan to age 95 or plan to 100?' To account for this possibility, retirees may need to spend less and ensure their investments can last over a long horizon. Other strategies can help mitigate longevity risk as well. 'Delaying Social Security helps to provide a lot of longevity protection,' Pfau said, particularly for the higher earner in a couple, since their benefit can later serve as a survivor benefit. Read more: How to find out your 2025 Social Security COLA increase He added that risk-pooling products, such as annuities, can also help manage longevity risk, though they may not be the best approach to manage inflation. Instead, inflation risk can be best managed through Social Security (with cost-of-living adjustments), Treasury Inflation-Protected Securities (TIPS), and a diversified investment portfolio for long-term growth. Pfau also addressed how many retirees experience lumpy spending in their early years of retirement, such as travel, buying an RV, or helping fund a child's or grandchild's education. 'You've got the idea of the go-go years, the slow-go years, and the no-go years of retirement,' he said. While many assume that retirement expenses will always rise with inflation, Pfau noted that for most individuals, 'spending does not keep pace with inflation throughout retirement.' While healthcare costs may increase later in life, other expenses tend to decline. 'So maybe after age 85, you don't necessarily go on those world trips anymore,' he said. 'You may not go to restaurants as often.' Adjusting for these natural spending declines helps retirees stretch their assets. 'That reduces your liabilities and increases your funding ratio,' Pfau said. 'So it helps make sure you're on track for a successful retirement.' Each Tuesday, retirement expert and financial educator Robert Powell gives you the tools to plan for your future on Decoding Retirement. You can find more episodes on our video hub or watch on your preferred streaming service. Sign in to access your portfolio
