Managing Retirement Income Through the Next Market Decline

If you’re retired, you know that declining markets are a challenge because you need distributions from your portfolio regardless of how the markets are performing.  To increase the odds of making it through a decline, here are some practical steps you can take now to keep your finances in reasonable shape.

Estimate Essential Living Expenses: The first thing to do is figure out what your base income needs are in retirement. What’s the smallest amount of income you need each month to stay afloat?  Most people do not know this number, and knowing it will give you a lot more control over your finances.  If things get difficult, you can reduce your distributions to your base amount and ride out the storm. The faster you can reduce your distributions, the less damage you’ll do to your portfolio.  Then when things recover, you can increase your distributions to previous levels.

Your base income needs include things like health care costs, real estate taxes, car loans or leases, mortgage payments, property and casualty insurance, food, clothing, and Netflix.  Well, maybe not Netflix, but that’s the point. Figure out what is essential and what isn’t, and then be prepared to reduce the things that aren’t essential if required.  There is no magic formula, you just have to grind through your expenses and see what can stay and what could go.  But this gives you a list, and a plan.

Reduce Payments on Fixed Bills: Second, if you’ve got bigger fixed bills, like auto loans or a mortgage, see what you can do to bring the monthly payments down. A lower monthly fixed payment gives you more flexibility.

If you still have a mortgage in retirement, it’s not a bad idea to consider getting the payment as low as possible. For instance, let’s say you are 15 years into a 30-year mortgage, you could refinance the remaining balance to another 30-year loan, and then see your monthly payments drop. Depending on when you took out your mortgage, you could see a 30% to 40% reduction in your monthly payment.

Stretching out your mortgage sounds counterintuitive, but once retired, living off your money is a cash flow game.  Because cash flow from your portfolio can be volatile, there’s value in getting all your payments as low as possible.  Yes, you may pay more in interest and it takes longer to pay off the house, but that’s not the goal once retired. The primary goal is to be sure you don’t run out of money; the other stuff is secondary. The lower your fixed costs are, the lower your distributions need to be in a market meltdown, and the higher the odds are you won’t run out of money.

Focus on Flexibility: You could also look at getting other fixed payments, like an auto loan, onto a more flexible structure, such as home equity line of credit. The difference is that with an auto loan, you have to pay back principal and interest every month, regardless of how the economy or your portfolio is doing. With many HELOCs, you have the flexibility to pay interest only. If markets get tough, it can make sense to simply pay the interest on your loan for a period of time. This lessens the withdrawals you have to take from your portfolio and raises the odds the money will recover and grow again.

The key to this approach is to use the flexibility to your advantage.  Make regular (or additional principal) payments when markets are good, drop down to the minimum payments when markets are bad, and then step back up again when markets are good. This gives you far more control over the cash flow out of your portfolio, and an ability to adapt to changing markets.

Finally, be prepared for the next market downturn by having some cash or stable money reserves on hand. There is no hard number that works for everyone, but you’d want to know that you wouldn’t be forced to sell your stocks for at least a few years, so make sure you’ve got enough in high-quality bonds, CDs, cash or similarly safe holdings.  That will help you sleep at night.

Disclosure. Above material is for information and education purposes only. It does not constitute investment, financial, legal, or tax advice. Consult your individual advisor for guidance specific to your circumstances.   Past performance is no guarantee of future returns, and all investing involves the risk of permanent losses.


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