The Journey: Declining Market Is No Time To Pull More Cash From Your Retirement Account
By Janet Kidd Stewart, Chicago Tribune (TNS)
Financial markets’ rocky start this month hasn’t seemed to slow down some retirees’ spending train, but it should, experts say.
Just when the holiday bills are looming like a bad hangover, portfolio values are retreating, which should be a wake-up call to trim withdrawals, but that isn’t happening, said Mari Adam, a financial planner in Boca Raton, Fla.
“Last year, returns were flat, and I’m starting to see some familiar patterns” to how some clients responded to the 2008 financial crisis, she said. “That was a horrible year, but the people who went into it with good financial habits came through it and are better than ever. Others got destroyed and never bounced back.”
In this year’s first week, she said, she sifted through a mountain of big-ticket portfolio withdrawal requests, while stocks were posting triple-digit losses and fixed-income experts were bracing for lower bond yields as interest rates begin rising.
“I have a desk covered (with requests from clients) who need extra money for things, and it worries me,” she said. “Some already ate into principal last year because it was a flat market, and we’re starting to see some people get into credit card debt again.”
Just what is overspending? There are myriad theories about safe withdrawal rates from retirement portfolios. Many start with a percentage of total assets in the first year of retirement, say 4 percent, and then adjust that figure for inflation thereafter, regardless of what happens in the market. Others, including financial planner and author Jonathan Guyton, take a more dynamic approach that allows for slightly higher withdrawals early on, but with the caveat that retirees may need to pull back if markets underperform.
Adam generally advises clients to withdraw 4 percent of last year’s ending portfolio balance but adjusts that as needed depending on circumstances and investment performance. For elderly clients in their 80s, for example, she typically recommends simply taking the required minimum distribution amount (which kicks in after age 70 1/2) from retirement accounts.
She doesn’t quibble with younger retirees who are spending slightly more than 4 percent in any given year. It’s the ones spending well above the guidelines that have her worried, she says.
“A lot of people are really ignoring reality and overspending,” she said. What to do? Take advantage of year-end spending reports from your credit card company and any budgeting software you use and identify the problem areas, Adam said.
But don’t stop there or you won’t set the tone for spending in the coming year, said Liz Davidson, founder of Financial Finesse, an online financial guidance service used mostly by employers that links retirement plan participants with advisers. Davidson’s book, “What Your Financial Advisor Isn’t Telling You,” was released this month.
Pre-retirees can make a huge impact on their savings rates by automating retirement plan and taxable savings account contributions, but adopting a mindful approach to spending helps both savers and retirees, Davidson said.
People have identities with their food choices that help them set boundaries and ward off temptation, she notes. Vegans, for example, learn to not even be tempted by a restaurant hamburger because they have taken that choice off the table ahead of time, she said.
“We tend not to have (comparable) financial identities, but if you think about it you might fall naturally into one. You might consider yourself an investment-oriented person so you don’t want to spend much on things that depreciate and you’ll put more into real estate that increases in value. Or you’re a bargain hunter, so you just rarely pay retail. Or a minimalist who wants to keep things simple. Or someone who enjoys particular activities and prioritizes those.”
Commit to conscious decisions about spending, she says, and a more appropriate withdrawal rate will follow.
ABOUT THE WRITER
Janet Kidd Stewart writes The Journey for the Chicago Tribune. Share your journey to or through retirement or pose a question at email@example.com.
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Photo: Pictures of Money via Flickr