What should a client do if she retires right before a severe market slide, turning any previous planning topsy-turvy?

That is a question financial advisors have been facing with their clients during the last decade, with two deep drops in the market during that time. T. Rowe Price has conducted a study that measures the outcomes of some potential solutions to the retirees' problems.

Take the example of someone who retired in 2000 with a $500,000 portfolio and started taking withdrawals of 4% with plans to increase her initial withdrawal by the inflation rate each year. That retiree would have started with an 89% chance of not outliving her money over a 30-year retirement. But over the next decade, two severe bear markets ensued--dropping those odds of retirement success to just 29%.

T. Rowe Price found that the best way to cope with that--the best possibility for restoring her odds of not outliving her money--comes at a high price: reducing withdrawals by one quarter for three years after each bear market. If she can cut back expenses to that degree, the odds of sustaining withdrawals over the remainder of the retirement period are 84%.

However, such a drastic reduction for most people may be not possible, acknowledges Christine Fahlund, a senior financial planner with T. Rowe Price.
"That is almost in the data just as a reference point," Fahlund says. "Some people can make that much of a cut, but not many."

Instead, the option with the second-best outcome may be easier to achieve: not taking a 3% inflation increase each year as had been anticipated when the retirement plan was established.

"That option is more realistic. Retirees can forgo the annual increase in withdrawals that had been planned and some even opt for not taking an increase for five years, rather than three," Fahlund says. "Many agree to keep the withdrawals flat, and as they progress some can even even cut back spending another 10% or 15%."

Not taking an inflation increase for three years after each bear market brings the odds of sustaining withdrawals throughout retirement to 69%.

Those who opt for a fourth possibility, switching to 100% bonds, fared the worst in the study, with no chance of having enough money to make it through retirement.

The study was put together in part because those retiring in 2000 looked like they had a perfect scenario for retirement, with a market that had gained an average of 17.8% a year over the previous two decades.

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