As a professional, you have worked hard to prepare for retirement. Bolstering savings, paying down debt, building up cash, and making sure all of your financial affairs are in order…it’s a lot. Unfortunately, the environment you retire into can have a big impact on your retirement savings. For example, if you retire into a declining market, everything you have worked so hard for can appear to vanish just like that. In the moment, it can certainly feel disheartening, and even scary, leaving you to wonder, can I still retire or do I need to keep working?
However, we’re here to assure you that you can retire during a financial crisis, you’ll just need to prepare yourself. Here are five ideas to help you prepare.
1. Project Your Cash Flow
While it’s certainly not the most riveting part of personal finance, a budget is arguably the most important piece of your financial picture. Forecast your retirement expenses on an annual basis. As a starting point you can use your current budget and then look to the future to predict changes you might have. Common changes in expenses in retirement include healthcare costs, mortgage costs if home is paid off, travel expenses, and fuel costs. Next, forecast what income you’ll have. Include your pension if you have one, rental properties, etc. And don’t forget about your Social Security income. It is common for people to defer Social Security from the point they retire to full retirement age or age 70. If you do this, you will likely have to take a larger distribution from other sources in your initial years of retirement. Once you have your estimated expenses and projected income figured out, you’ll be able to clearly see what your monthly and annual shortfall (or surplus) will be that will need to be covered by your retirement investments.
2. Build a War Chest
Next, you can build up a reserve to help protect yourself if and when the markets decline. Typically, we advise clients to maintain the next 2 to 4 years of distribution in a “war chest” type of investment. This could be short term bonds, treasury inflation protected securities, or money market. When markets are up these assets do not appreciate very much, though when markets are down, they do not decline very much. The intent of these funds is twofold: 1) a behavioral tool to help you keep the rest of your funds invested when the markets decline, since you’ll know you have safe funds to draw from, and 2) to actually draw from if the markets decline. If markets are rising, you are typically better off pulling from your growth-oriented investment mix. However, if markets are declining, it is better to let those funds recover and spend down some of your war chest.
3. Remove Emotions
We know, easier said than done. Hopefully the previous two exercises will help you to speak logic to yourself when your emotions are telling you to panic. To be fair, when you enter retirement, your portfolio value is likely the largest it has ever been. Up to this point when markets have declined there was probably at least a small sliver of you that said this is a great buying opportunity and my new contributions are buying on sale. That thought is unlikely to enter your mind when the markets are declining and you’re in retirement no longer making contributions to your investments. The market ebbs and flows will likely be of similar magnitude in retirement as when you were accumulating wealth. However, the dollar swings will be the greatest swings that you’ve ever experienced because your portfolio is as large as it has ever been.
As an example, if you have a $1 million portfolio and you have a swing up or down of 20%, that is a $200,000 swing. Compare that to a portfolio of $500,000 just 6-8 years prior, which would have the same percentage swing, but half the dollar swing. I know this is elementary math and is an elementary concept, however, when someone experiences it for the first time in retirement, it can be quite shocking. That’s why I encourage you to prepare yourself for these types of scenarios and remind yourself that you have a war chest and a plan of action. Understand that there will be market declines in retirement. We often tell clients that stocks will decline 20% or more 6 to 7 times throughout their retirement.
4. Part-Time Work
Some people are counting down the days until they no longer have to work, other people enjoy the work but enjoy spending time with their family more, and still others get satisfaction from continuing to deliver value with their unique skill set through work in retirement. Working part time can help emotionally transition you from full-time employee to full-time retiree, as well as help to financially bridge the gap.
5. Know What Levers to Pull
Now that you have projected your cash flow, built out a war chest, and identified your ability to earn a future income, you can determine which levers to pull first when the markets throw you a curveball. It might be as simple as deciding to reduce your annual expenses by limiting travel this year, or it might be something a bit more extreme like deciding to start taking distributions from your war chest so your investments can weather the storm. Whatever it is, it’s good to know that you have options.
At Sonmore Financial, we understand that your retirement is a long-awaited opportunity to spend your time on what is most important to you, whether that includes travel, volunteering for a valued cause, enjoying more time with family, or even launching a “second-act career.” We also understand that life—and the markets—throw curve balls, which is why we create comprehensive retirement plans designed to weather the sunshine, as well as the storms. Reach out to our team to get started.