I retired in March of 2008, when the Dow Jones Industrial Average was at 12,266. I then watched in horror as the market slid 46 percent my first year of retirement, cracking my nest egg and leaking my money all over Wall Street. In just one year the market had erased nearly all the gains of the preceding decade — clearly not what I had in mind the day I quit my job forever.
How did I get any sleep that year? By accepting the things I can’t control and taking charge of the things I can. There are five ingredients to a financially comfortable retirement:
- the size of your nest egg
- the rate it will grow
- how many years it needs to last
- how much of it you will spend each year
- inflation’s impact on that spending
I know I can’t control the direction of the market, the rate of inflation, or how long I will live. What I can control is how much I spend.
Take charge of what you can control. Most financial advisers recommend an initial withdrawal rate of 3 to 4 percent of your retirement assets, adjusted each year for inflation. But there’s no reason to take out that much if you can live on less. Why not take a more flexible approach, withdrawing less in the lean years by cutting back on discretionary spending? You can always go back to a more extravagant lifestyle as the market picks up.
We didn’t do anything drastic like downsize our house or move to a cheaper location. Instead we opted to forego long-distance travel, cut back on dining out and buying clothes, and veered towards free entertainment sources during that year of the incredible shrinking market. Not only did those small adjustments make a large impact in our spending, but knowing we could live happily on less went a long way toward a better night’s sleep. It didn’t hurt knowing the cuts were just temporary either.
Cushion the blow for things you can’t control. While you may not have control over the direction of the market or inflation, there are things you can do to prepare for the worst. Besides saving as much as you can and paying off debts while you are still working, make sure you’ve crafted a well-diversified portfolio. Maintain those asset allocations by rebalancing periodically, which will also take the emotion out of your investment decisions. Understand your own tolerance for risk and shift toward a more conservative portfolio as you age. Have several years of liquid assets available so you aren’t forced to sell investments at rock-bottom values during a market meltdown.
No one’s dream is to enter retirement just as a recession hits. But if you focus on what you can control rather than what you cannot it doesn’t have to be a nightmare.
Sydney Lagier is a former certified public accountant. Since retiring in 2008 at the age of 44, she has been writing about the transition from productive member of society to gal of leisure at her blog, Retirement: A Full-Time Job.