We recently talked with a couple who retired in 2021 and are panicking because of the market decline and high inflation. Since retiring, they have been living on their after-tax retirement savings; however, with inflation and market performance, they have watched their savings shrink faster than what is comfortable for them.
The reality is that you cannot time your retirement with market movements. The market is volatile despite the incredible rally we experienced for nine years. True, the market’s performance in the first few years of retirement when your portfolio is at its largest can make a difference long term, which is referred to as sequence risk. Withdrawals during a down market can be more costly because they can deplete an account more than a similar withdrawal during a bull market.
This is where the Henssler Ten Year Rule can help. We begin the process of securing spending money 10 years before you need it. When you retire, you and your adviser will have moved 10 years of money needed for living expenses into fixed-income securities that mature over the next 10 years. By buying bonds and holding them to maturity, you know how much you’ll be receiving. With 10 years of expenses accounted for, you have the option to wait out our current decline before selling growth investments to buy bonds for your spending 10 years from now.
Another point we discovered in this couple’s situation is that they had not started taking Social Security because they wanted to wait until age 70 to receive delayed retirement credits. Experience has shown us that there is generally a 10- to 12-year breakeven point when delaying benefits, meaning you would have to live to 82 before the dollar value received would exceed the value of receiving benefits early. Instead of depleting your after-tax retirement assets, we highly recommend supplementing that retirement income with inflation-adjusted Social Security.
Taking benefits today can help you keep more of your money in your portfolio. You have been paying into the Social Security fund your entire working life. These benefits are owed to you. Additionally, Social Security has no beneficiary while your retirement account does.
For many investors, there are also opportunities in a down market. Rebalancing your portfolio allows you to adjust your asset allocation and modify your diversification to suit your current needs. You can take profits from overweighted sectors and reinvest in securities that are at a discount relative to their price when the market was up. Tax loss selling should allow you to offset any investment gains and offset up to $3,000 in ordinary income.
While the current market may be bumpy for a while, investors who follow the Ten Year Rule have time for the market to recover. And, to keep things in perspective, while the market is down, it is not down to the level it was in February 2020—before the pandemic and the cycle of high valuations.
If you have questions on how to begin shifting your asset allocation for retirement, the experts at Henssler Financial will be glad to help:
- Experts Request Form
- Email: experts@henssler.com
- Phone: 770-429-9166
Listen to the September 24, 2022 “Henssler Money Talks” episode.