Retiring in a recession? What future retirees should know about retirement during a market downturn

Most companies no longer offer employee pensions, and Social Security usually replaces only a small portion of people’s pre-retirement income. According to the Center on Budget and Policy Priorities, a person with average lifetime incomes would only earn 37% of their pre-retirement income from Social Security benefits. This means that the responsibility to save for retirement rests entirely with the individual.

As a general rule, personal finance experts recommend that retirees save 25 times their annual living expenses. In other words, someone with annual living expenses of $40,000 should aim to save $1 million for retirement. At retirement, the individual would withdraw no more than 4% of their retirement portfolio annually, taking inflation into account.

However, this rule has fallen into disuse as people’s lifespans lengthen and the cost of living rises. Because the 4% retirement rule is based on assumptions about people’s lifespans, portfolio allocations, and historical market returns, it is not a one-size-fits-all rule.

“That’s why planning is so helpful, so you don’t have to use rules of thumb,” says Douglas Boneparth, president of Bone Fide Wealth.

In fact, Richard Sias, professor of finance at the University of Arizona, recommends a much lower withdrawal rate. He found that people would actually need to withdraw a meager 2.26% from their portfolio (assuming a 60/40 stock and bond split) to have a 95% chance of success. In other words, if you withdrew 2.26% of your retirement nest egg annually, you would have a 1 in 20 chance of running out of money before the end of your retirement.

And if you’re worried about how the recent market downturn will affect your retirement rate, researchers have looked to history to see how seniors fare when they retire in a bear market. T. Rowe Price examined the performance of people’s retirement portfolio after retirement in bear markets in 1973, 2000, and 2008, finding that portfolio values ​​eventually rebounded or exceeded their original value about 10 years later.

The researchers note the importance of flexibility in response to market downturns. Retirees should use a withdrawal rate that changes based on factors such as inflation, market fluctuations, and changes in individual spending needs to ensure long-term success.

And there’s no expert consensus on what you should do with your wallet.

If you’re an experienced investor, Boneparth suggests taking advantage of the current downturn by buying stocks or equity funds while they’re low. But of course, if the market hasn’t bottomed yet, you are taking a risk.

“The reality is that the market will likely go down further,” says Mark Pitre, principal at California Financial Advisors. “Because we think there will be a better opportunity to rebalance next year, two years or three years.”

And since interest rates have an inverse relationship with bonds, it might not be a good idea to pour all your money into bonds either. When interest rates rise, bond prices fall, so upcoming Fed rate hikes mean that existing bonds will be worth less in the future.

Shannon Saccocia, chief investment officer at SVB Private, recommends investors refrain from making big changes to their portfolios without consulting a financial planner and try to stick to their long-term financial plan.

And if you’re considering changing your portfolio allocation now, you’ll want to make changes based on your long-term plan. With stocks and bonds performing poorly, now may not be the best time to make significant changes to your portfolio, especially if the market continues to fall.