She takes herself as an example: At 51, Anspach says she’s 100% in equities and plans to stay there until she’s 55. At that point, she’ll shift a portion to a bond set to mature when she’s 65. This strategy also allows her to skip a really bad market year if necessary.

“If you start 10 years out, and that’s a down year, then wait a year,” she counsels. “The reality is that most people show up between one and five years prior to retirement, and these options aren’t available in the same way.”

The Right Way To Tinker With Withdrawals
At some point, advisors and clients may run out of pain-free solutions to sequence risk mitigation, and the time will come to address a retiree’s withdrawal rate. Spoiler alert: A reduction in withdrawals doesn’t have to be all that draconian.

The Vanguard team says you can dampen the risk by using an adaptive withdrawal strategy for the first five years of retirement. Some years you get what you expect, other years a little less, but overall you can likely avoid outliving your wealth, increase your bequest levels by 20%, and withdraw as planned for the remaining 30 years.

Take the hypothetical person who retired in 1973. They withdrew 5% from their portfolio in the first year. A simple calculation determined the withdrawal for year two: The researchers multiplied the portfolio’s new value by 5% and compared that with the $25,000 withdrawn the first year. If the new figure were higher than the prior figure, then year two’s withdrawal could be increased up to 5% over the previous year. But if the new figure were lower, the year two withdrawal would also be lower, though not below a predetermined floor. In this case, the researchers used 2% as the maximum reduction in any given year. The idea was to repeat that every year for five years, then withdraw normally after that.

Even the seemingly small 2% reduction in withdrawal dollars, they found, had big consequences for the retirement portfolio. While the retiree still felt the impact in their planned bequests, they did not outlive their assets.

“This strategy eliminates the risk of portfolio depletion for all bear market retirees, even those who retired into the Great Depression and the tumultuous late 1960s and 1970s,” the Vanguard researchers wrote. “These periods represented the greatest risks in our almost-century’s-worth of data. For both groups [bear market and bull market retirees], overall retirement income remained largely at the same level.”

For clients who don’t like the idea of variable income, the Vanguard team released its second report in April of this year, called “What Can New Retirees Withdraw From A Portfolio? A Scenario Analysis.” (This time Khang and Clarke were joined by David Pakula.) The team updated its economic assumptions with more current figures, such as higher inflation and moderate-to-low stock and bond returns for the next decade. The researchers determined that retirees leaving work in 2022 could take fixed withdrawal amounts expressed as a percentage of the initial portfolio balance and avoid depletion in 85% of their simulations over 30 years. The percentage ranged from 2.8% on the downside to 3.3% on the upside.

“Compared with the 4% rule, these estimates are low, but hardly catastrophic,” the researchers wrote in the 2022 study. “Even if the prospective return environment mirrors the worst regime in the past 60 years, analysis suggests that retirees can count on a 2.8% withdrawal rate. And for investors approaching retirement now, that rate would be applied to portfolio values that have benefited from strong stock and bond returns over the past few decades.”

That point was seconded by Alicia Munnell, director of the Center for Retirement Research at Boston College, when she assessed the immediate future for retirees.

“It’s never fun to enter a retirement in a down market, but we have to put it in perspective. There were soaring gains in 2020 and 2021,” she says. “Now, once you’ve got those gains they feel like they’re yours and when the market goes down it feels unfair. The challenge is that you want to use your assets to support yourself so you can put off claiming Social Security as long as possible, because that is the most valuable source of income for a lot of people.”

For new retirees who have to take Social Security now, there’s still an upside in that next year’s cost of living increase should be 8.5% and the Medicare Part B premium shouldn’t go up at all.

“When things are uncertain, if you have an option and don’t hate your job, I would try to keep working at least until there’s more certainty,” Munnell advises. Or at the very least new retirees should use their cash first to keep their equities in place. “Try not to have to realize your losses.”

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