Timing is everything.
And retiring in a bear market - or even something just flirting with bear status - couldn't be worse timing.
Baltimore's T. Rowe Price Associates crunched some numbers to figure the impact of a bear market on retirement, after the S&P 500 index fell nearly 18 percent between October and March.
Bear markets - usually defined as a 20 percent decline in the market - are never happy times for investors. But hitting one in the first five years of retirement can spell serious trouble down the road.
If your portfolio loses money or returns are weak in those years, the chances of your running out of money in retirement go up significantly, Price found. That's because your portfolio is shrinking at the same time you're selling off investments to support yourself.
Those investments won't be around to recover when the market eventually does.
"It's hard to catch up to get back to where you were," says Christine Fahlund, Price's senior financial planner.
You can't control the markets, of course.
Bear markets will happen, and in retirement you should count on hitting several of them if history is any guide.
But you can control your response.
Price also ran the numbers on what happens to people who cut back on spending during bear markets, those who don't, and those who panic and shift all their money from stocks to bonds. Hint: The panicked investors fared the worst.
After decades of saving for retirement, it's difficult for new retirees to make the transition to spending a nest egg.
As a guide, Price and other financial advisers usually recommend that you withdraw 4 percent of your investment portfolio the first year of retire- ment.
After that, you can increase the dollar amount each year by 3 percent to keep up with inflation. So with a $500,000 portfolio, you can withdraw $20,000 the first year, $20,600 the next year and so on.
This strategy, Price calculates, gives you a 90 percent chance of not running out of money. These calculations assume you spend 30 years in retirement, which for many people takes you to age 95.
But bear markets early on can throw this off course.
Consider what would happen if you stuck with this withdrawal rate from January 2000, through the last bear market and all the way up to January of this year. We'll assume you started with a $500,000 portfolio made up of 55 percent stocks and 45 percent bonds. Your initial withdrawal was $1,667 a month.
