Bear market no time to retire


Your Money

May 20, 2008|By EILEEN AMBROSE

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.

According to Price's figures, by the bottom of the bear market at the end of September 2002, your portfolio shrank to $374,096. Your chances of having money at the end of retirement were reduced to 57 percent. Those are odds most of us wouldn't like.

Luckily, the market recovered. If you stayed the course - only increasing the amount of your withdrawals by 3 percent a year - your portfolio would have returned to $447,375 in January this year. And the chances of having money throughout retirement went back up to 78 percent.

But if you had reduced the amount you took out of your portfolio while the market was weak, you would be in even better shape.

For instance, if you had not increased your withdrawals for inflation for the first four years, your portfolio in January this year would have been $461,799. You would still have about a 90 percent chance of having money into old age.

Or, if you reduced your monthly withdrawal amount by 25 percent at the bottom of the bear market, your portfolio would have been $484,245 in January. And you would only have a 1 percent chance of outliving your money. Your monthly withdrawal would now be $1,582. But you could increase that by about $500 and still have an overwhelming chance of success.

The worst move would have been to flee stocks near the bottom of the market and rush into bonds. Your portfolio would have fallen to $337,753 early this year and you would have a 95 percent chance of being penniless someday.

You can run your own scenarios using Price's online Retirement Income Calculator at

The lesson to take from these numbers, Fahlund says, is that when markets are falling "try to cut back on the amount you are withdrawing."

Or, if possible, consider delaying retirement a year or so until the bear market has passed, Fahlund says. You can still take vacations or do some of the things you planned for retirement. But staying on the job a little longer and having fewer years of retirement to finance can do wonders for your finances.

Financial planners say they are delivering these messages now to near retirees.

Phillip Cook, a financial planner in Torrance, Calif., has been urging a client to reduce his high lifestyle for the past three or four years. Now the client plans to retire in July, at a time when interest rates on his investments are low.

The client now will have to rent out his Palm Springs vacation home and will be able to visit only in the off-season, Cook says.

Michael Beriss, a private wealth adviser with Ameriprise Financial Services Inc. in Bethesda, says people might not like to hear that they have to cut costs. But most do when faced with the math and the prospect of running out of money in retirement, he says.

"Reality is a remarkably powerful force," Beriss says.

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