Monday, Oct. 26, 2009

A Post Bear-Market Retirement Strategy

If you're in your 60s, the recession probably hit you harder than any other age group. Why? You're young enough that you may still own a slew of stocks, which crashed and burned at precisely the wrong time for you — just before or just after you retired. Nothing decimates retirement finances like steep losses as you first start pulling money out of your IRA or 401(k) or other long-term savings. You suffer the double whammy of withdrawing funds while prices are depressed and then having fewer assets to rebound in the recovery. It can take years off your ability to live well.

Say you are 65 and have $1 million socked away in an IRA, which is invested 55% in stocks and 45% in bonds. Given historical rates of return, you have just a 10% risk of outliving your money over the next 30 years if you commit to pull out only 4% of the balance every year (with yearly increases for inflation), reports fund company T. Rowe Price. But your risk of running out of money is a startling six times greater — 60% — if you're confronted with a bear market right out of the box and your assets shrink by a third, which is what happened to many new retirees the past couple years.

The only good news to report here is that a recovery seems to have taken root and asset prices (stocks, in particular) have already begun to bounce back. If you had an emergency fund or the standard one year of expenses sitting safely in cash, and spent that money and left your IRA alone, you've already made back half of what you lost in stocks. That bit of prudence alone may translate into several years worth of income. Of course, there's no guarantee you'll get the rest back no matter how long you're able to wait. But here are some things you can do to get your retirement finances back in synch with your needs:


Planning For Retirement: Your 60s

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