Riding Out Financial Ups and Downs if You're Retired
Retirees tend to live on a few income streams, typically made up of (1) Social Security monthly payments (2) RMDs (Required Minimum Distributions) from deferred income retirement accounts, such as 401(k)s, (3) pensions and other long-term investments and (4) savings accounts. Financial conditions affect all of these financial vehicles one way or the other, especially if retirement, pension or savings are invested in stocks or bonds. Last year, for example, the stock market probably rewarded most retirees with healthy gains, while so far this year, stocks haven't fared nearly as well.
Currently, there is another factor that more directly affects retirees: Inflation. As we've seen over the past several months, inflation has caused a spike in the prices we pay at the gas pump and in the grocery store. In fact, prices are broadly higher everywhere, and for those retirees living on a tight budget to begin with, that is not good news. A recent hike in Social Security benefits due to the higher cost of living didn't help so much because, at the same time, Medicare premiums went up.
So what can retirees do to ride out the financial ups and downs we're experiencing? A recent article in The New York Times by financial writer Tara Siegel Bernard cites a few sound strategies. Retirees who turn 72 must take RMDs from retirement accounts, so some of your options are limited, but you still have control over your other assets. Here are some suggestions from the article:
- Reframing: Covering your needs is more important than spending money on wants. Think about how much of your basic living needs can be covered by such regular income as Social Security and pensions and keep withdrawals for other items to a minimum.
- A Cash Bucket: Set aside cash to cover a year's worth of basic expenses not accounted for through Social Security and pension income. Use this "bucket" when necessary instead of withdrawing from investment accounts.
- Guardrails: Consider being flexible with annual withdrawals from investment accounts instead of being locked in to the same percentage or withdrawal amount. Consider taking higher amounts when financial conditions are favorable and lower amounts when they are unfavorable.
- Check up: Do periodic reality checks based on your retirement age and anticipated longevity. Look at your entire portfolio and, using the widely accepted withdrawal rate of 4 percent annually, estimate how long your money will last if you withdraw at that rate. You could also determine how higher or lower annual withdrawal rates will affect your overall picture.
Of course, none of these strategies should be applied in a vacuum. It is best to do your own evaluation in conjunction with a Certified Financial Planner, who can objectively assess your unique situation and help you determine which of these strategies, or others, will work best for you.
Read more about advice for handling retirement during a financial downturn here:
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