So, let me guess, your portfolio was down, at least a little, in 2022? 

Nobody gets excited about a year rife with market volatility, but they can be especially concerning for those in retirement who are withdrawing money from their portfolio and have less control over other income streams. The question of “How to protect my retirement savings?” naturally comes up. 

Here’s a quick “tale of the tape” from 2022:

• The S&P 500 index was down almost 20%.
• The NASDAQ (tech index) was down more than 30%.
• U.S. Intermediate-term Treasury bonds were down 12%. 
• The typical U.S.-based 60/40 portfolio was down 16%.

Ouch. But, if we expand our horizons, the news gets better. U.S. large-value companies and international value companies lost about half of what the S&P 500 lost. So, if you were well diversified, you should’ve fared better than “the market,” but unless you were shorting or gambling on individual sectors or companies, even (if not especially) the most disciplined market investors lost money in 2022.

If you’re still accumulating wealth, these returns probably didn’t faze you too much. It wasn’t as scary as 2020 and didn’t do the damage of 2008-09. Sure, your overall balance might be lower, but if you’re still pounding monthly contributions into your 401(k) plan or other retirement accounts, you were buying shares on sale. 

But what if you’re retired or soon to be?

This is a different story, both numerically and emotionally.

Numerically, it’s different because you were not buying more through contributions and may have been taking distributions, inevitably compounding the market’s losses. This phenomenon is referred to as the “sequence of returns risk,” and it is especially painful in years when the market loses in successive years. 

It is notably in these scenarios where static retirement withdrawal plans can falter—yes, even the classic “5% rule” or its more diminutive cousin, the “4% rule.” More sophisticated retirement planning—like that which features Monte Carlo simulations of hundreds of varied market returns—can give retirees more confidence in the face of uncertainty, but down markets can still leave retirees feeling like the ice is cracking beneath their feet.

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The Downside Of Downside

For example, let’s use a not-so-hypothetical example from our last notable market shellacking. Frank, we’ll call him, decided to retire at the end of 2007, having crossed the magic million-dollar mark in his retirement savings. 

Having ridden out a couple of previous market mishaps through his accumulation years, Frank maintained his confidence in equities staying fully invested in the market with a handful of large-cap mutual funds that largely mirrored the S&P 500. 

That left him walking straight into one of history’s great one-year market meltdowns. But that’s not all, folks. The other rule of thumb Frank applied was the ol’ 5% “safe” withdrawal rate. We’ll give Frank the benefit of the doubt and say he moved $50,000 to cash on New Year’s Day 2008 for income that year. 

Therefore, by New Year’s Eve 2008, Frank was staring at his statements, stunned, having seen his million-dollar nest egg slashed to approximately $590,000 after distributions and losses. But what could he do at that point? He stayed the course, still optimistic for a successful retirement.

He took another $50,000 out of the portfolio for income—now representing more than 8% of the portfolio—and before St. Patrick’s Day 2009 had even arrived, Frank was looking at a retirement balance that was less than half of where he started. Only 14 months in. He capitulated—sold out—and who could blame him?

This is a problem numerically. But it’s an even bigger problem emotionally. That’s because even when the numbers work, retirees are left with a sense of disempowerment, especially in down-market years. As a retiree, you simply have less control. Less control over your retirement money—and less control over the ability to recover from market losses.

How, then, can retirees respond effectively in the face of losses? We’ll offer one numerical solution and one behavioral solution:

First, from a numerical perspective, you may buffer yourself from sequence-of-returns risk by greater diversification in your portfolio. In fact, in retirement, it’s possible to have more money by being willing to make less. Huh!?

Making More With Less Risk

Yes, it’s true. There’s no denying that, historically speaking, stocks make more money than bonds. However, when you stack portfolio distributions on top of market losses—losses that tend to cut deeper with stocks than bonds—the numbers change. Glance at this mind-numbing graphic from Morningstar:

Long story short, it shows that with a 4% withdrawal rate, you have an 87% chance of not running out of money in retirement with a 100% stock-based portfolio, whereas you have a 95% chance of not outliving your money with a portfolio that is invested in 50% stocks and 50% bonds. The 50/50 portfolio wins out statistically, with a 5% withdrawal rate, too.

Yes, it’s possible that you could have more money in retirement by investing more conservatively. I’d also wager that having a more conservative asset allocation will help you emotionally in retirement because you won’t be as likely to freak out as Frank (above) understandably did experience such deep losses.

But there’s another behavioral step that you can take to increase the probability of sustaining your portfolio in retirement: Go with the flow, man.

Dynamic > Static

Instead of sticking to a static income number, allow that number to float in accordance with your portfolio’s performance. When the market expands and your portfolio with it, that’s a good year to take the whole family to Disney; but when it contracts, along with your balance, that’s a good year to tighten your belt a little. 

There are numerous “dynamic spending rules” that one could attempt to apply in retirement. Still, a simplified version is offered by one of the financial industry’s most prolific number crunchers, Michael Kitces.

Kitces suggests a starting point of a 5% withdrawal rate with the expectation of increasing inflation each year. However, “if the ongoing withdrawals relative to the portfolio rise above 6%, then spending is cut (because spending is dangerously outpacing portfolio growth), while if the withdrawal rate falls below 4% (as portfolio growth outpaces spending growth), then the retiree would get a spending increase.”

It’s retirement spending with guardrails.

In the end, the best strategy is the one that works best for you and that will be different for every individual and household. But regardless, that strategy is likely to have the best outcome if it is a blend of numbers and emotions, spreadsheets and behaviors, money and life.

Your Carolina retirement planners specialize in structuring working retirement plans that are catered towards your specific needs and goals. There will be up and down years, but the important thing is that both you and your advisor are on the same page and stay the course. Consistency is key in meeting your financial goals. Contact the advisors at Triad Financial, a nationally recognized yet Greensboro-based financial planning firm, to see how we can help.