There are some rules, like the 4% rule, that allow you to guarantee that you have money for your retirement, no matter the circumstances; although experts suggest being more flexible in the amounts of money you withdraw
2022 was not a good year for the stock market. This may not matter to most people, however, they lose sight of the fact that if they have retirement accounts, this type of news directly impacts their investment portfolio. We must add that for this year, many experts believe that the United States could fall into recession. What does all this mean for you, if you plan to retire this 2023?
From the beginning of 2022 through November 2, the value of the S&P 500 fell more than 21%, the Dow Jones fell more than 12%, and the Nasdaq fell nearly 33%. In other words, investing in the stock market had one of its worst years. In case you didn’t know, IRAs and 401(k) plans are invested in stocks and funds, so these drops probably affected your portfolio in some way, maybe not that significantly.
As if this were not enough, Kristalina Georgieva, head of the International Monetary Fund (IMF), recently estimated that a third of the world economy could fall into recession during 2023. That would mean that many companies and consumers would back down on their buying intentions. In addition, throughout 2022, the Federal Reserve (Fed) increased interest rates five times to contain the high inflation that marked last year.
In other words, a decline in the value of your retirement investment portfolio plus higher prices plus a possible recession makes for an unfavorable outlook for retirement. However, there are ways to prevent yourself.
Personal finance experts generally recommend that retirees aim to save 25 times their annual living expenses. In other words, if a person has annual living expenses of $40,000, he should aim to save $1 million for retirement. If your annual expenses are lower, then your savings goal may be lower. How to know? Multiply your living expenses by 25 and you will have the retirement savings goal you require.
Having that goal, how do you know that it will be enough? Based on the above calculation, the person aiming to retire should not withdraw more than 4% of his or her retirement portfolio annually, while his or her investments continue to adjust for inflation.
Although other experts question this rule, due to the change in lifestyle and current high costs, if you carry out this plan, the amount of your savings should be multiplied by 0.04 to obtain the amount of withdrawal that you can afford per year. For example, if you have $500,000 available in your retirement account, each year you should only withdraw about $20,000 for your expenses (500,000 x 0.04 = 20,000). And at that amount, you must divide it by 12 to know how much you should have available for each month. In this example, you would have about $1,666.66 per month (20,000 / 12 = 1,666.66).
And if you’re worried about how the recent market downturn will affect your retirement rate, T. Rowe Price looked at the performance of people’s retirement portfolios after they retired into bear markets in 1973, 2000, and 2008 and found that the values of the portfolio eventually recovered or exceeded its original value some 10 years later. In other words, if you start your retirement this year and you are 62 years old, even using the proposed withdrawal rate, it is possible that your portfolio will recover part of its investments with the balance you have available at age 72.
Although it is also convenient to make a change in the risk of your portfolio and stop managing a 60/40 proposal (60% stocks and 40% bonds), many of the specialists consider that it is better to be flexible in the amount of money you withdraw from your savings to ensure the success of your money for long-term retirement. In fact, some of these experts suggest an annual withdrawal rate of 2.26%, that is, withdraw $2,260 per year for every $100,000 saved during your retirement.
In short, if you retire this 2023 and assuming there was a recession, it is better to withdraw less money and increase the amount when the cost of living increases.