Episode 74: Retiring During a Market Downturn: Strategies and Insights
In Episode 74 of Accessible Finance, we address a pressing question for those approaching retirement amid a market downturn: Should you wait to retire or proceed as planned? Hosts Eric and the team dive into the complexities of this decision, discussing essential factors such as portfolio balancing, the 4% rule, shortfall funding, and the importance of having a flexible retirement spending plan. They delve into the concept of Guy Klinger's guardrails and risk-based strategies to manage sequence of returns risk. The episode provides valuable advice on how to stress-test your retirement plan, adjust spending, and maintain financial stability despite market fluctuations. Join us for expert insights to navigate your retirement successfully.
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Podcast Episode: Retiring During a Market Downturn: Strategies and Insights
Episode 74: #45 “We’re about to retire, but the market is down. Should we wait to retire or just go for it?”
📍 📍 📍 📍 Welcome to episode 74 of Accessible Finance. Let's dive in.
Rachael
Alright, so Eric, today's question is one that's been popping up a lot lately. Um, especially with our current, uh, market status. So, uh, we're about to retire, but the market is down. Should we wait to retire or just go for it? And this has gotta be one of the hardest decisions that people have to make, um, because you like to say a lot, you know, it would be great if the market is at.
All time lows the entire time that you're working. That's correct. And then spikes up at the time that you're about to retire. I do like to say that a lot. You do. Um, so we're about to retire and it has spiked up. It's actually trending downwards. Right, right, right. We're getting nervous.
Eric
Yeah. No, this is a really great question.
Um, yeah. Market downturn makes the decision to retire difficult and it's gonna make people get cold feet. Mm-hmm. Think about working longer. So it's, it is, it is very important to think about the framework and talk about the framework that you should use when making those kinds of decisions.
Rachael
Wonderful.
So if someone's looking at their portfolio and they're seeing that overall it's down 10, 20%, what is the first thing that they should be considering before deciding like, yes, no retirement?
Eric
I think the first thing you're thinking about is your overall plan, right? So you need to think about. How you're making your decisions, right?
What are, what are we basing this on? The portfolio balance? If so, like what and what, what? Like you've heard about probably a 4% rule is one that people throw around quite a bit. Very common. So you need to think about like what does the 4% rule mean when we're using that as a rule. Um, you're trying to come up with the shortfall after you've taken your fixed income component.
So like, after you've got your pension or your social security, what does the shortfall look like? Yeah. Does that make sense? So maybe I wanna spend a hundred thousand dollars after taxes. My social security's 40,000. Mm-hmm. Now that's gonna put $60,000 I need, I needed to, to rely on my portfolio for $60,000 a year.
Rachael
And something you said I think is really important. Um. You said you're trying to fund the shortfall, right? Correct. And then in your example you said, um, I wanna spend a hundred thousand dollars in retirement. So we're not talking the shortfall of what you have been spending, we're talking the shortfall between what you're getting in fixed income and what you will be spending.
Right. Um, and. Oftentimes we can see people making the mistake of, oh, once I'm retired, like I'm gonna,
Eric
yeah. I'm gonna spend, spend 60% of what I do today. Yeah.
Rachael
And I spend so much less. The reality is you're now actually having to occupy a lot more of your time. Correct. Um, and we do like to advise our clients retired to something.
Right. You may initially be thinking, oh, you know, I'm gonna sit down. I'm gonna be able to watch Red Zone all day. I am. That's great. Until it's not. And so you want to make sure that you are, you have a plan in retirement for what it is you wanna do, and you've kind of mapped out what those costs are so you can kind of get close to what that shortfall really is,
Eric
right?
Rachael
Um, okay. So then all of that makes sense to me. Um, but if someone doesn't have enough guaranteed income, um, or cash reserves. What would you, uh, or would you say that they should wait to retire?
Eric
No, not necessarily. So the way we handle it, and the way most people will do it, is they will have, um, a variable.
It variable spending levels. Right. And that, that will depend on how they wanna handle it. So there's, you've probably heard of Guyton-Klinger guardrails. Um, there's, you know,
Rachael
you probably haven't heard of Guyton-Klinger guardrails unless you're in the financial industry.
Eric
Touche. Fair enough. But fair point.
Rachael
It is a thing that exists.
Do you want to speak briefly about what. Guardrails are correct.
Eric
Guardrails refers to the idea. What I'm just, I'm assuming the general public has not heard of Guyton-Klinger guardrails.
Rachael
I have heard of Guyton-Klinger guardrails because he talks about Guyton-Klinger guardrails.
Eric
That's pretty funny. That's true. Um, fair enough.
So typically, we'll ha Guyton-Klinger guardrails are, there's a, he set up a guy, the, the researchers set up framework for adjusting.
Rachael
Are they Guyton and klinger?
Eric
Yes. Oh. Um, for. Adjusting your expenses throughout retirement. And the idea is, um, generally speaking, like when your portfolio goes up 20% or down 20% in value, or like you can set percentages around the portfolio fluctuations and then you reduce your spending by a set amount.
Rachael
So it sounds like you need to know yourself well and have honest come to Jesus moment with yourself.
Eric
Right.
Rachael
Um, and look historically, are you someone who has been able to change your spending habits needed?
Eric
That's a fantastic point. So, um, thanks. Yeah. No, it's, it's very good. So a lot of people can't, yeah, a lot of people can't, won't, whatever.
They're not going to do it, so we shouldn't plan on them doing it.
Rachael
The life creep is very real for many.
Eric
It is.
Rachael
Um, but there are some who are fantastic at it.
Eric
Right. And the idea is that variable spending is important and there are other, there, there are other options here. Mm-hmm. If you're worried about like sequence of returns risk, 'cause that's essentially what we're talking about.
Right? And that concept is, um, the idea, well. Sequence of returns. Risk refers to the fact that if you experience down market downturns immediately upon retirement, it significantly impacts, negatively impacts your ability to generate returns in the long run. Why is that? Because you are going to sell. More shares to generate the same amount of dollars when the stock, when the price per share is lower.
So you have less available. I mean, you don't have to think about it in terms of per share if you don't want to, but the idea is there's less left to grow. Yeah. After you've pulled a higher percentage out because the total nominal value has gone down. Does that make sense?
Rachael
So compounding interest or your compound growth is happening on less Dollars.
Eric
Exactly. Correct. Um, that is a much more succinct way to say it than I, I was fumbling.
Rachael
No, but it makes sense, right? So like, if I, if in my retirement portfolio I have a million dollars, right? And so I'm planning on having to take out, you know, a 50,000 thousand. I was planning, I'm planning to take out $50,000, right? I need $50,000. The market has set a huge downturn. We're talking 10%, 20%, right? So my million dollars is no longer a million dollars. It's now 900,000, 800,000. I'm still taking out 50,000. That's a much bigger percentage of what my portfolio was, and so it now leaves me with $750,000 to grow instead of right. You know, 950.
Eric
Exactly. So I, I think probably the two primary strategies here, um, that we're, that we're talking about is you, you probably will hear like a bucket strategy where we'll have a bucket of, you know, cash reserve, like a, somewhere like some people call it like a treasure chest or like a war chest or something along those lines.
Um, and you can set aside an amount of cash that allows the, you know. Individual to feel comfortable, right? So they can, they can weather the storm, so to speak, with their cash reserves so you don't have to dip into your equity por portion of their portfolio. Um, the other alternative to that is if you have some kind of framework or guardrail, they don't have to be based on the portfolio fluctuations and we would argue that they shouldn't be.
Um, what we like to use, well, we'll go into that in a second, but. You want, uh, you want a plan before it happens, and then you can verify what's gonna happen for the client. So you, you can ask them, Hey, look, the market's down, you know, 20% today. Are you comfortable reducing your spending by, you know, it doesn't have to be 20% necessarily.
Yeah. But like, this is what it looks like now for you to have a viable plan. Correct. Are, is this okay? Yeah. Are you amenable to this idea? If the answer is yes, great. Wonderful. Keep going.
Rachael
I think that's huge. I think that being able to quantify to somebody. Um, how much reduction we're talking about and what that might look like, right?
Like, I know Eric and I are very involved with cashflow with our clients. It's been a huge value add for them and it allows us to be intimately, um, familiar in meetings with the things that can really move the needle. So if we know kind of their spending habits and we know how much they're needing to kind of cut back on or reduce, we can help them quantify that in terms of.
Um, rather than dollars. 'cause not everybody's intimately familiar with what they're spending the dollars on. They know they're spending it, they know how much they're spending, but they don't really know where it's going. But if it means, you know, alright, so instead of going out to dinner every weekend, you might have to go out every other weekend.
Right? Instead of going to a concert every month, you might be going, you know, you might be taking out hiatus on concerts for a bit. Um, but it does allow for us to be able to, um. Kind of quantify for clients what that looks like. And that could potentially be the difference between them being like, oh, that's definitely feasible, that's doable.
Um, versus like, no, thank you. Uh, yeah. Alright, so continue. Go ahead. Sorry.
Eric
Can we talk briefly about the framework that we use? So you could have a fixed withdrawal rate. We would argue that that's not exactly the best way, the best approach, because you are. How you're setting up a fixed withdrawal rate to a very variable and volatile portfolio.
Mm-hmm. Right? So you're not matching the things appropriately. Right. Does that make sense?
Rachael
And so you're talking like when we're looking at that like 4% rule?
Eric
Correct. And we're trying a 4% rule or a 3.26% rule. Mm-hmm. Because. It's gonna dramatically depend on what year you started. Yes. Right? Like if you start right before the great financial crisis, yeah.
You're gonna have a very different experience than if you started, you know, in 2020 and then the market just goes up 20% year over year for a couple years.
Rachael
So the 4% rule, is it useful in so far as seeing like long, like if I am. Approaching retirement. Is it useful for me being able to like kind of nail down like, okay, I'm not close enough to be able to retire anytime soon.
Eric
I think it's, I think it's pretty good for determining what kind of a nest egg you might need.
Rachael
Yes, exactly.
Eric
Given that you're gonna retire at a normal age. What I mean by that is if you're gonna retire at about 65 Yeah. And we think you're gonna lift from maybe 30 years or so, that's sensible. We want to use it when we're gonna have 25 or 30 years.
We don't want to use the 4% rule if we're retiring at 40 or 50. And we might have to fund a portfolio for, for over 40, 45 years. Sure.
Rachael
And so then once you are retired and you're now dipping into the nest egg, the 4% rule seems a lot less effective?
Eric
Correct. So the way, the way we, our approach is what we, we use what's called risk-based guardrails.
And so we use planning software to tell you essentially your probability of success given. A multitude of variables, like our expectations for portfolio returns, equity returns, domestic, international inflation, et cetera. And then, but more importantly, your lifestyle returns. Yeah, I'm gonna buy a vacation house.
I want another car. Yeah, I want all of these things into my, built into my plan.
Rachael
And that's what I think what is so very important. I think that we. Tend to, um, think about retirement or withdrawal in terms of kind of isolated variables. And the reality is that everything comes into play, right? So the portfolio that you have and the portfolio that I have could be identical, but then it could tell you that you're able to retire and tell me that I'm certainly not.
Um, and so the software that we use and the software that most financial planners would use is like this beautiful Venn diagram of. All of the things that you, um, have that are expenses that you're. Paying towards, you know, every single year. It also allows us to factor in, um, things that you have determined that you really want, like a new car, right?
Like one-time purchases, but one-time purchases. You need factored into your plan because, you know. I know that I wanna do this, right? I know I wanna leave X amount to my kids. I know that I want to continue contributing five 20 nines to the grandkids, right? So all of that information is incredibly, um, important.
Eric
Mm-hmm. Yeah. That's a great, that's a great point.
Rachael
Perfect. Um, all right, so these are some great ways to stay flexible, but what about someone who's thinking, all right, I've waited long enough, I don't wanna delay retirement. Um, I'm just ready to go like. What things should they really be thinking about?
Eric
Like how can they really stress test their plan, um, software, I think Monte cargo analysis and start moving some levers. Yeah, so pull some inflation levers and you know, investment return levers and things like that and determine what outcome that has on your plan. And really more meaningfully for clients, the probability of success is not gonna really.
Matters much for you. That's kind of like a planner thing. Mm-hmm. They planners are supposed to know how to explore that and, and how to convey that to, you know, clients. The idea is that you should be spoken to in terms of what impact that's gonna have on your spending. So maybe we're telling you like, instead of spending $10,000 a month, can you spend $9,500 a month?
Because that's what needs to happen. Yeah. To have the same probability of success as you did before. Maybe we, we agree that you're comfortable with, you know, 75% Right. And so that's where we wanna be, but we can't, um. We can't guarantee that, you know, we can't guarantee that that's gonna happen when the markets drop.
So the market might drop, you might be go from 75% to 70. Mm-hmm. So to get you back to 75, 1 of the easiest things we can do is change the spending needle. Or hey, we, we eliminate one of your goals. Maybe it was buying $50,000 new car. Maybe if I don't buy that car anymore, maybe now I'm, I'm moving the needle back up towards my 75%.
So the idea is we want you comfortable with the risk that you're ta your plan is taking overall. Correct. And we wanna kind of. Equalize that, or at least not allow it to vary outside of the risk-based guardrails. Does that make sense? So the idea is we're gonna keep your probability of success within parameters that are acceptable to you and us.
Mm-hmm. As the planners, but also it allow, the reason we would do something like that is because it allows for less adjustments in income on an annual basis than if we just tie it to the portfolio balance. Does that make any sense? Yeah. So the idea is we want you to be able to weather the storm, right?
With imp well with impunity. If it's not, you know, we don't want you to have to endure any, like, you know, lifestyle changes or like shifts down in your spending if you don't need to.
Rachael
I imagine it kind of like the reverse of like, we like to tell our clients all the time that our goal is to lower your lifetime.
Taxes that you're paying. And so we try to, to prevent your taxes from being really high, really low, and all over the place by mapping out the taxes you're gonna pay in the future and trying to kind of flatten that line. Right? And so our goal in retirement is gonna be the same thing to try to essentially say, okay, there's a lot of noise happening over here.
Mm-hmm. But I know that we have a plan in place and we have. All of the factors together so that I can kind of spend a pretty like flat line amount here and I'm minimally impacted by market fluctuations. Right. Or an emergency that happens 'cause I've got an emergency fund for that. I have a plan for this.
Um, was that seem fair? Yeah.
Eric
No, I think that's, I I like that a lot. Yeah, I like that a lot. Like the idea. Yeah. The idea is here we're, we're, it's, it's gonna be. We're trying to keep the flat part here. Uh, be let, we're gonna let that be your spending. Correct. If we can. Right. And the probability of success we're allowing to fluctuate because we understand that markets are volatile and they will fluctuate.
Correct. Right. When we talk about like a 7% or 6%, or whatever long-term return we're gonna use, we understand that that's not how markets look. Correct. It's gonna be plus 20 minus 12. Right? Like it's not gonna be a flat straight line.
Rachael
And we have clients who have. Like iron stomachs and we'll check the market hourly. Right. And we have clients who want to know zero things about it because it is stressful. Right. And so I think, you know, for us, our goal is always to try to. To take some of that burden off of the clients to say, okay, we are watching the markets. We know that it's moving like this. Mm-hmm. And we are looking at your plan success and the volatility's gonna happen in there, and we're okay with that.
But then those guardrails that you're talking about are what really tell us like, okay. It has been volatile in the wrong direction for too long. We're now starting to see something that is necessitating some behavioral shifts or some planning shifts. Right. The goal, of course, is not to get there, right?
Um, and we know that markets are going to have downward fluctuations and they're gonna rebound. Mm-hmm. And so we'll adjust accordingly. But you know, if the push comes to shove and there is a change that needs to be made. We could certain tell you.
Eric
Yeah. I think the most important thing to do is to agree on the framework that you're going to use to make these decisions beforehand.
Yes. Do not subject yourself, don't make decisions. Whimsically based on markets at an all time high. Or my portfolio says 5 million instead of 4 million, so now I should buy a house. Right? Like, don't do things that way. It is not good.
Rachael
I think it's human nature to want to correct. You're gonna see numbers get really big and get excited.
Right. And you're gonna see numbers get small and get really worried. Mm-hmm. Um, and so overall, you know, and we like to tell our kids this too, like when the, when our kids are kind of arguing back and forth, we know the truth is somewhere in the middle, the true balance of your account is gonna be somewhere between the lows that you see and the highs that you see.
Mm-hmm. So don't use either one as like gospel to, to change behaviorally, right? Correct. Um, I think that's. Really, really good point, Eric. Um, so you did mention sequence of returns risks, um, before. Mm-hmm. Um, especially when the market's dropping early in retirement. Um, so can you speak a little bit about, um, like how that works and why it's such a big deal for new retirees in particular?
Eric
Well, for one, it's gonna be very scary, right? Like you're withdrawing from a much lower value. Mm-hmm. Um, and especially as you get, as you accumulate a larger nest egg, you're gonna see six figure fluctuations on a daily basis. Or when markets, you know, dip, you're gonna. Your portfolio's gonna drop quite considerably.
Um, but you're asking just to explain sequence of returns risk again, like why is it bad
Rachael
Well, to take, so we have sequence of return risks, like just, we're bringing it back there really quickly. We know what it is. What are some strategies that you could really have to at least mitigate that in the, like short term, like let's say I am retiring tomorrow and at Market Close today.
Everything bottomed out. Right. Like everything is really low. Sure. I'm now scared.
Eric
Okay.
Rachael
Right. What are some at least short term strategies that I can implement in the hopes of allowing my, my account to rebound? Like I know I need to pull out like 50,000, um Right. But I now we, in our example, we discussed the fact that now that's a much larger percentage of my portfolio.
Sure, sure. Is there anything I can do to re. Prevent having to pull out 50,000.
Eric
So yeah, there are a couple things preemptively that probably ought to have been done. Um, and if they're not, then we at least want to do them now. And that would be, pull out the cash beforehand, set aside the cash. It doesn't have to be in cash in a checking account, but you can.
Uh, sell equities. Mm-hmm. And move to transition to like money market positions. Yeah. And then you can sell the money market positions 'cause they're not gonna go anywhere. Right? Market dips, money market's gonna stay the same. You can sell that, you can get your dollars out, you should have your $50,000, your next years of expenses in a money market fund anyway.
Um, particularly if you have like RMDs, right? You might wanna keep that liquid. You might wanna keep a year of expenses, liquid at least. And then you won't have to be as nervous, I guess, about the. About the movements of the market. But one of the things to talk about when we're talking about the guardrails is it does eliminate the idea.
Um, it does eliminate the need for substantial or significant cash positions over time. The idea is that you're going to be rebalancing, um, you're gonna be rebalancing within, hopefully you're gonna do it. The way we do it is what academia, uh, has determined is correct. Right? Yes. So it's 20%. Um, we use 20% bans.
What that means is I, we've, we've articulated this before, we have in, but if I, I want 10% bonds. Mm-hmm. Okay. Then I'm going to rebalance if my bond position gets to 12% Right. Or 8%, which is 20% variance from the 10 or deviation from the 10.
Rachael
Correct. So it's a rebalancing strategy that takes place when the percentages of the portfolio are out of the like 20% kind of wiggle room.
Correct. That we're allowing for, again. We don't want to allow outside influences to determine our behaviors either. Yeah. Um, 'cause it's very, you know, like we said, it's human nature to react to things that are happening. Yeah. So if you have a really good plan in place and a really good strategy in place to prevent that kind of knee-jerk reaction from happening.
Eric
Right. You want it to be formulaic.
Rachael
Correct. And so. You should feel very empowered to speak to your financial planner if you're working with one, and have them be able to articulate to you very well and very clearly what formula or what process they are using for all of this. Correct. Yeah. They, if they can't, that would make me very worried for you.
Eric
Yeah. Just very succinctly, brief piece of advice. Yeah. Ignore the noise. Focus on your plan. Forget the market. Don't try to time 'em. Uh, rebalancing is, you know, we are believe with the fundamental premise, underlying rebalancing is reversion to the mean exists. Mm-hmm. And that we think that, you know, if something's incredibly undervalued now it's, it's more likely to go up and down in the future.
The idea though is look, ignore the market. Focus on your plan. Don't focus on the noise that you're gonna see every time you turn on your television. Right. You're gonna see the financial networks just. I'm telling you that you should run for the exits, jump for the hills. You don't wanna do that. That's true.
You don't wanna make rash decisions. You want to have a formula beforehand so that when you're in these spots and you're feeling anxious and nervous, you don't make these decisions. You want a framework for making the decision correct. That isn't how you're feeling in that moment. Correct. Because when the markets are going down, you're gonna be feeling.
Anxious, scared, you know, you're gonna be wanting to pull it out.
Rachael
One, just like in our previous episode about when life throws you curve balls, you don't wanna be making financial decisions
Eric
under duress. Yeah.
Rachael
Correct. And so, you know, retiring under, like in a downward market is essentially a curve ball that life has thrown you.
Exactly. So you still wanna be able to follow the process and procedure you've had in place. So Eric, it sounds like retiring in the market downturn is tough, but not impossible.
Eric
Yep.
Rachael
So with the right strategy, you can certainly still make it work.
Eric
Absolutely.
Rachael
Really good advice today, Eric. And as always, we would love to hear from you guys.
Um, if you have retired during a downturn or you're looking to retire during this current downturn, let us know what has worked or hasn't worked for you, or if you have specific questions, please do not hesitate to email us at podcast@equilibriumfp.com.
Eric
Thanks guys.
Rachael
Till next time.
