The best way for retirees to navigate the current economic climate, which includes dips in the economy coupled with high inflation, is to have a flexible distribution plan and investment savings portfolio, according to experts.
The economy has been undergoing significant volatility this year, with equities failing to provide the performance investors are searching for. The Morningstar U.S. Market Index is down 24.9% so far in 2022. Normally, investors rely on bonds to bail a portfolio out when equities are down. But that has not been the case this year, as the Morningstar U.S. Core Bond index had fallen by more than 14% by the end of the third quarter.
Speaking on a panel Tuesday at the “Investing in Inflationary Times,” webinar sponsored by Financial Advisor and MoneyShow, Christine Benz, director of personal financial at Morningstar, highlighted the difficulties retirees are having in determining their spending amounts.
“It has been a tough environment, especially for retirees,” she said. “Complicating things is we have had this big inflation shock.”
This one-two combination has made it difficult for retirees to react. In the past, when the economy faltered, the standard recommendation to retirees was to spend less, Benz said. However, with the soaring inflation numbers, the cost for everyday items has ballooned, making it difficult for anyone to curb spending, much less retirees.
As the S&P 500 has declined this year, advisors have had to rethink their strategies in dealing with sequence risk—the specific damage done to withdrawal plans when markets fall right after a person retires. Advisors have traditionally recommended that retirees withdraw money at a 4% rate from their investment funds. But Benz said that number is not realistic.
“When we look at the data, people don’t really spend that way, and we all know from our own lives that our spending tends to be lumpy from year to year,” she said.
Jamie Hopkins, director of retirement planning at the Carson Group in Omaha, Neb., also spoke on the panel and agreed that the 4% rule was good as a discussion point in academia but otherwise wasn’t practical in the real world. His firm takes a more holistic approach and treats spending as an evolving equation.
“We use a more dynamic approach that tracks a person’s actual spending and where they will be over time,” he said.
Morningstar also uses a series of different dynamic withdrawal strategies. Even when there are minor tweaks to a strategy, it can significantly elevate the starting safe withdrawal rate, Benz said. Morningstar favors a guardrail approach that calibrates withdrawals based on what is going on in a person’s portfolio.