A lot of folks in and near retirement are finding out the hard way what studies have long shown: Market declines are especially damaging in the years just before or after you quit work for good.In a new poll, AARP found that those over age 55 and who had been in the workforce within the past three years have seen a significant erosion of their assets since before the recession — 61% said their assets were down and just 18% said their balances had even begun to recover.
These dismal numbers are at odds with the general experience of anyone who has hung tight. The stock market, while volatile and yet to surpass pre-recession levels, has nonetheless been trending up for several years. Anyone who did not sell during this rough period likely has seen their assets rise smartly, and those who kept investing new money each month may well have much higher balances today than they did before the crisis.
One obvious explanation for the struggles of those 55 and over is that because of their life stage they may have sold stocks at the worst possible moment. Those nearing retirement might have shifted wholesale into safer, lower return investments just as the market was hitting bottom. Meanwhile, the newly retired might have begun to draw down their nest egg as long planned to make ends meet. In both cases, they would have been selling at depressed levels; they never gave their assets a chance to recover.
Managing the move to safer securities and your drawdown rate is a huge issue for prospective and new retirees. Assets sold at the bottom make a deep dent in your portfolio, one from which you may never recover. It’s important to review your holdings and adjust. Here are some effective strategies:
- Work a little longer. In some cases, you may find you need to delay retiring. Working full time just a few extra years can be a game-changer, delaying but saving your dreams. Another powerful solution is taking a part-time job that pays enough for you to leave your portfolio alone and let it recover.
- Withdraw a little less. In a report on retiring in a bear market, mutual fund company T. Rowe Price found that reducing your withdrawal rate by 25% when stocks are depressed may be enough to retire on schedule and still make your depleted nest egg last. Another option is forgoing any inflation-adjustment in your withdrawal rate for three years, according to the report.
New and prospective retirees are a lot like everyone else in that, according to the AARP poll, they believe the economy has worsened in the past year; jobs are harder to find; retirement security is more difficult to achieve; and Congress is powerless to reignite growth. But they are very different from every other cohort in that right now their time to call it quits is proving to be one of the most difficult in modern times.