How to Save Your Retirement Investments in a Recession

Last week I discussed how the 4% rule is a good starting place for retirees. But to get the most out of your retirement, it’s important to go beyond this. The answer for many is to use Dynamic Withdrawal Rules where spending is slightly adjusted based on the market environment. By being flexible, you can on average spend significantly more throughout your retirement. When your withdrawal rate gets too high because of increased spending or lower returns, you cut spending modestly. You can increase spending when your withdrawal rate gets too low because of lower spending or higher returns.

Because markets usually go up but sometimes down, most retirees get to increase spending more often than they need to decrease spending.

However, there are times when downward adjustments in spending are necessary to save your retirement investments. The 35-year period beginning in 1966 and ending in 2000 is one of those periods. JPMorgan reviewed a balanced portfolio during this period. Instead of starting at 4% and increasing withdrawals every year for inflation, a retiree used dynamic withdrawals, including taking no increase for inflation if returns were less than 5%. As you can see below, the portfolio that made adjustments (green line with dots for adjustments) lasted far longer than the portfolio that made no adjustments (green line with no dots).

While they spent less in the early years of retirement, they spent 25% more in total, and their portfolio lasts more than 10 years longer.

While real life is not nearly as predictable as a back-tested scenario, the main takeaway is that flexibility is key in retirement. Being able to lower spending when needed will give you peace of mind and the ability to spend far more if the market recovers.

Happy Planning,

Alex

This blog post is not advice. Please read disclaimers.