Amid Market Chaos, Strategies For Your Retirement Savings
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What is the main topic discussed in this episode?
I'm Charlie Turner at The Wall Street Journal, and this is your Money Briefing. How should retirement savers prepare for market shocks like the one we've been experiencing?
But what if you cut your spending when the markets cause your portfolio to decline? And so if people, there are certain sort of recipes for doing that that have held up very well looking at historic data.
How did the coronavirus market shock affect retirement portfolios?
We'll talk with Ann Turgason of The Wall Street Journal in a moment.
It's quite unsettling to see your retirement portfolio tumble by 10% in a matter of a week. That's been the reality for many investors as the coronavirus outbreak has led to extreme market volatility. So what steps should you take ahead of time to protect your portfolio in the event of a coronavirus-like sell-off? Joining us is The Wall Street Journal's Ann Tergesen. Ann, I assume if one is years away from retirement, there's no reason to make changes to a long-term financial plan. But what should retirees or near-retirees do?
When should long-term savers change their retirement plan after a market sell-off?
What's the first thing that they should consider in the event of a market shock like this?
Well, one thing that they might want to consider is just doing some simple math and trying to figure out whether they've saved adequately, whether the amount that they've saved, especially for people who are near retirement who might have the option to postpone retirement, working longer is one possibility. So you really kind of owe it to yourself to do that math and figure out whether the amount you've saved is going to be sufficient or whether maybe it's going to require you to be a little bit aggressive throughout retirement.
Is there some formula that works that would help a saver figure out how much he or she should save?
Right. So the basic formula is that you take the amount you want to spend.
How do you calculate how much you need to save using the 4% rule?
In the article, I gave the example of a couple that wants $90,000 in income, which would be pre-tax income. And you subtract the amount that you expect to receive in terms of a pension or Social Security. So in the example, I took $90,000 of income, subtracted $50,000 in expected income, Social Security, and we're left with $40,000, which is the amount that you need from your savings every year to sort of plug that gap. You multiply that number, $40,000 by 25, and that gives you a million dollars. Now, that assumes that you're going to be withdrawing that $40,000 according to the 4% rule, which is a rule that has held up throughout most of the markets that we know about historically. Even during the Depression, the 4% rule held up.
It's not to say it will hold up going forward. In fact, there are some people who believe that it's too aggressive and that retirees need to spend more like 3%. But that's just sort of a barometer to give you a rule of thumb.
What's another thing that people should do against market falls? You talk about how it's probably best to go more conservative.
Well, it's really up to you. I mean, all these things are judgment calls. So, you know, there is some research that shows that, you know, typically what people do is they manage their money on sort of what they call a glide path throughout life so that when you're in your 20s, you know, ideally you have like 90 percent in stocks and 10 percent in bonds and When you're in your 90s, you might have the reverse.
Should retirees reduce stock exposure right before or after retiring?
But throughout your life, you're sort of reducing your dependency on stocks and increasing the percentage of your money that's in bonds. There is some research that shows that when people in the, say, five or so years, five, maybe six, seven years after people retire, they're more vulnerable to stock market declines. And the reason why is because you're taking money out. And if the markets are falling, your balance is declining because of the markets. And then you're sort of exacerbating the problem by pulling money out. And of course, right when you retire, a lot of people have to think about making that money last for 30 years or so. So this research shows that when people, in the five or six years after people retire, it's better to actually have a lower allocation to stocks at that point.
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Chapters
7 chapters
1
What is the main topic discussed in this episode?
0:05–0:28
2
How did the coronavirus market shock affect retirement portfolios?
0:28–1:10
3
When should long-term savers change their retirement plan after a market sell-off?
1:10–1:51
4
How do you calculate how much you need to save using the 4% rule?
1:51–3:27
5
Should retirees reduce stock exposure right before or after retiring?
3:27–5:08
6
How can working longer or doing the math improve retirement security?
5:08–5:51
7
What practical withdrawal and rebalancing strategies protect retirees during downturns?
5:51–8:07
Speakers
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