Retire in a Down Market? Not So Fast

Retiring at 65 could mean as many as 30 to 35 years running seniors' marathons, dipping your toes in tropical waters, or just cooling your heels. Over long periods of time, the ups and downs of the stock market even out. That's no help when retirement is looming and the market is in the tank along with your retirement portfolio. But getting your spending money by selling investments whose values have dropped could be the torpedo that sinks your retirement ship.

There are a few simple techniques that can help you sidestep this predicament or bolster a retirement portfolio that isn't as big as it should be. All you need are a couple of years to prepare. The less-than-ideal alternative is reducing your retirement standard of living to match your new financial reality.

During the first years of retirement, selling investments when your portfolio is below target can take years off your retirement plan. Stay at your job or work part-time, but do what you can to postpone withdrawals from your portfolio until the market recovers.

Consider a $500,000 retirement portfolio that earns an estimated 7% annual return and a 3% inflation rate. That portfolio would provide about $23,300 of annual retirement income for 30 years. The Dow Jones Industrial average fell from 10,400 in March 2002 to below 8,000 by October the same year.  If this portfolio suffered the same fate and fell 20% to $400,000, starting those $23,300 withdrawals could chew through the money as quickly as 10 years sooner. (To keep the money going for 30 years, the annual withdrawal would have to drop 20%, to $18,660 in this example.)  But by March 2004, the Dow was back to 10,400, so waiting 18 months to start withdrawals would have put the plan back on track.

Another potential advantage to waiting is beefing up a nest egg by continuing retirement account contributions. Suppose Ethel earns $50,000 a year and contributes 15% to a 401(k) account. If Ethel worked 3 more years at the same salary, she'd add another $22,500 to her account. Her retirement income would get an additional boost because she also shortened her years in retirement. Waiting 3 years to retire and making those additional contributions (assuming the same 7% annual portfolio return and 3% inflation), her annual income would jump to about $28,800 a year, a 23% increase.