An older couple sitting on a couch going over financials with a laptop

Retired, Now What Should You Do?

If you are retired and need to live off the income from your investment portfolio, this is a particularly challenging time.  The rule of thumb advice to just “wait out bad markets” doesn’t work that well when you need money every month from your portfolio.  As John Maynard Keynes is credited with saying, “the market can stay irrational longer than you can stay solvent.” Yes, markets will recover, but will they recover before you run out of money?

If we look at prior recovery cycles, we see that when the technology bubble burst in early 2000, the S&P 500 declined about 50% from its high and took almost seven years to recover.  In the financial crisis that started in late 2007, it took the stock market about 5.5 years to recover.  Those are the most recent data sets to consider and likely the most relevant.

In a big financial crisis, you should consider that it can take five years or more for the value of your stock portfolio to recover.  Consider if you take 4% per year (the generally recognized base distribution rate for retirement) for five years, you’ve consumed 20% of your portfolio.  If you do that during a period when the portfolio falls 50%, you are digging a big hole.

If you are retired, you’ve got to avoid taking distributions from stocks while they are down.  Moreover, at the start of any crisis, you should plan on not taking money from the stock part of your portfolio for at least three to five years. Now, the market could come roaring back and maybe it won’t last that long, but you should plan for that. Because if it does take that long and you don’t have a plan, you’re in deep trouble.

Figuring out how to generate income during the volatility can be challenging. Here are a few strategies to consider:

First, use your interest and dividends to help meet your distribution needs. If you have a diversified portfolio of stocks and bonds, you probably can generate 1.5% or so in cash flow, and that can serve as a portion of your 4% distribution. Remember, using interest and dividends does not consume principal because these are payments being made to you as an investor. That means you only need another 2.5% from somewhere else.

Second, consider keeping at least 30% of your funds in stable assets, that means cash, FDIC-insured CDs, Treasury bonds, or other high-quality diversified bonds. This gives you a reservoir to tap while your stocks are down.

And finally, cut your distributions. While you might like to live on 4%, in a financial crisis, anything you can do to reduce distributions will improve the survivability of your portfolio.  I know it’s not fun to live on less, but most of the working world will be living on less for the foreseeable future, as people lose their jobs, see bonuses disappear, and salaries reduced. If you are retired, consider cutting your distributions to survive this. I expect if you do these three things, you’re likely to both make it through the crisis and be in a position to grow your portfolio once the crisis is over.


Disclosures. Above material is for information and education purposes only.  Past performance is no guarantee of future returns.  All investing involves the risk of permanent losses, and there are no assurances that any level of distributions can be supported by a portfolio. Consult your individual advisor for guidance specific to your circumstances. 

Start the Conversation