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Retirement Income Strategies for our Next Bear Market

admin March 16th, 2018
financial advice for retirement planning

The good times have been rolling on Wall Street, but will you be ready when things change?

On March 9, 2009, the beleaguered domestic stock market picked up its head and began a charge full speed ahead. The market has been positive ever since. While most of us have benefited from this run, it’s prudent to evaluate our income strategy now, during the good times, for the next bear market. Our current bull market just celebrated its 100-month birthday, nearly double the 55-month average. This continuing climb comes on the heels of the first group of Boomers hitting 70½, the age when they must start withdrawing from their retirement accounts.
The word “dynamic” can be defined as “always active or changing.” It’s probably not the first word that comes to mind as we think about aging or retirement. However, “dynamic” is exactly how you want to be with your investments in retirement. This applies both to investment management and annual withdrawals.

Why Retirees Need to be ‘Dynamic’ with Their Withdrawals

The origins of the 4% rule can be traced all the way back to a study by the Harvard endowment in 1973. More frequently cited is the research from financial planner Bill Bengen. In summary, they said that, based on certain market assumptions, retirees can withdraw about 4% of their initial portfolio value every year and be prepared financially for a 30-year retirement. Their thinking means that if you started drawing $40,000 from a portfolio of $1 million and increased that $40,000 every year by inflation, you should be OK. The markets will go up and down, but that $40,000 distribution will continue to increase.

However, according to research by Vanguard (and almost everyone else), you have a much higher likelihood of success taking 4% of the previous year-ending account balance. This means your distributions are reduced in bad market years and increased in good ones. This works especially well if you have enough annual fixed income from Social Security, pensions, etc. to cover your basic expenses.

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