Related topics: retirement, retire well, investing strategy, portfolio, financial planning
In the midst of the stock-market meltdown in October 2008, Arthur Szu-tu, a relatively new retiree at 60, was gripped with fear and anxiety. He had no pension, he was too young to collect Social Security benefits, and he was relying completely on his savings.
"Intellectually, I knew I couldn't cash out my stocks because I might live another 35 years and I would need the higher investment returns that come from stocks," says Szu-tu, a former technology manager from Syracuse, N.Y. "But emotionally, it was really scary."
As retirees watched their account balances plummet, many were advised to reduce their withdrawals or go back to work to preserve their nest eggs. "The thought of becoming a Wal-Mart greeter or McDonald's counter boy did not allow me to sleep at night," quips Szu-tu.
He decided he would rest easier if he mentally separated his investments into two groups: cash and bonds that could sustain him through his initial years of retirement, and stock funds that he would leave untouched until they could recover and grow.
Without realizing it, Szu-tu had stumbled on an alternative income model that has been kicking around in some retirement-planning sectors for more than 20 years but attracted little attention until recently. As long as the stock market was booming -- and bonds performed well when stocks tanked -- the so-called 4% rule for systematically withdrawing retirement income from an investment portfolio worked well.
That rule of thumb became the gold standard for creating sustainable retirement income. According to the 4% rule, if you invest in a moderately risky portfolio of 60% stocks and 40% bonds, you can initially withdraw 4% of your assets, increase that amount in subsequent years to keep pace with inflation and still have a 90% probability of not running out of money over a 30-year retirement.
Probabilities are fine -- until you become a statistic. The recent bear market was so severe and so unusual (because virtually every asset class, except Treasury bonds, suffered severe losses) that it has called into question even that conservative strategy. The biggest threat to retirement wealth is withdrawing too much money from a shrinking nest egg, because there may not be enough left to benefit from the inevitable market rebound. Retirees were urged to skip their annual inflation adjustments -- or, in cases of severe investment losses, to reset their 4% distribution schedule based on their new, lower balance.
Income for life
Philip Lubinski, a financial planner in Denver, has spent more than two decades advising clients on how to prepare for retirement. "If it weren't for inflation, cash and bonds would be all you need," he says.
But even with modest inflation of 3% a year, your buying power would be cut in half in about 25 years, so you need to invest for future growth, too. When you add stocks to your portfolio, however, you also add risk.
