Prepare for Detours in the Market: Manage Your Plan in Real-Time
When the stock market takes a dive, retirees with resilient income allocation plans still get by swimmingly. Here's what that looks like.
Once you’ve created an income plan for your retirement, don’t think you’re done when the numbers on paper meet your immediate expectations. A successful plan requires regular analysis and adjustments. Both might be required, either because your goals change or the world shifts.
That is the benefit of an income allocation plan over other types of planning.
When I wrote an article called Don’t Bet Your Retirement on Monte Carlo Models, I suggested reliance on safe sources of income, including annuity payments, and a modest outlook on the market to avoid huge ups and downs that you can’t control.
From just $107.88 $24.99 for Kiplinger Personal Finance
Become a smarter, better informed investor. Subscribe from just $107.88 $24.99, plus get up to 4 Special Issues
Sign up for Kiplinger’s Free Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
I did not suggest that you take your money out of the market entirely. Stocks, after all, offer a history of increasing value over time. The hair-raising loss of value, though occasional, tempts some investors to avoid the roller-coaster ride and thus miss out on the longer-term — and sometimes muscular — increases in the market value of equity securities.
How to maintain discipline and ‘stay the course’
What should you do when the Dow Jones average falls for most of a month, or pundits express concerns about a looming recession? Having less of your income dependent upon the market helps. Diversifying your source of withdrawals (primarily your traditional rollover IRA) in a balanced portfolio of stocks and bonds is a plus. And I advocate this: Consider thinking of your investments not as stocks and bonds, income annuities and savings, but as sources of income divided into an interest-portion, dividend portion, annuity payment portion and withdrawal portion. In doing so, you may find that the only source of income impacted by a market swing is your withdrawals. If those represent a small portion of your income, you’re more likely to stay the course.
It is also important to remember that you can always evaluate your Income Allocation plan and update it as circumstances change. We call that “plan management.”
Let’s look at a hypothetical example of a female client who retired at 70 and adopted an Income Allocation plan. She had $1 million in savings at retirement with 50% in a rollover IRA and the balance in personal after-tax savings. She based her plan on a modest stock market outlook of 6% per year. The market performed as expected over the first 10 years and she has already received $505,000 in income from the original plan. Next year’s expected income is $56,000 from dividends, interest, annuity payments and withdrawals. Her income is planned to grow at 2% per year until age 85, continue for life, and still leave of a legacy of over $600,000 at age 95. She feels good about it.
A change of circumstances
Then the stock market goes into a nosedive with a 20% loss in just a few weeks. (Steep drops are not unprecedented. In 2018, between the beginning of October and the end of December that year, the Dow average lost nearly 19%. Of course, it recovered shortly afterward, but it can still be unnerving, and one day it might not recover so readily.)
What should our retiree do in this situation? She may legitimately feel that her financial future is vulnerable. Should she cancel the trip she had planned? Or cut back on gifts she had penciled in for the grandkids?
No.
Before taking any such drastic actions, she gets an update of her plan, based on the current value of her stock portfolio. Here’s what she’d see.
- This year’s income continues at $56,000, thanks in large part because of the guaranteed annuity payments that were part of her original plan.
- Percentage increases in income to age 85 drop to 1.5 % per year vs. 2.0% prior to the stock market pullback.
- Legacy at age 95: $520,000 vs. $600,000 prior to the drop.
What do these numbers mean? And what should she do?
First, the change in next year’s income is not as dramatic as she had feared. In fact, her income will still increase, albeit by not as much as before.
Second, while she understands that there is no free lunch, the updated plan absorbs the market shock and converts that into lower increases in income to age 85 and a lower legacy to her kids and grandkids.
Third, the plan she adopted originally acted as a shock absorber because of the large proportion of safe income.
Now, should she accept the updated plan or request that it be further modified to meet her new set of objectives? For instance, perhaps she wants to preserve the amount of financial legacy she had planned. She can adjust her plan if she wishes, and that is when she should talk to her adviser.
Planning is continuous
In any case, the continual review and refinement of her plan together with a smart and safe long-term strategy worked best for her. What you need is the ability to update your plan when needed without giving up the elements that made sense when you first put it together.
Visit the Income Allocation Tool at Go2Income to start your plan, ask questions and then, make some decisions about what is best for you and your family.
-
Forget FIRE: Why ‘FILE’ Is the Smarter Move for Child-Free DINKsHow shifting from "Retiring Early" to "Living Early" allows child-free adults to enjoy their wealth while they’re still young enough to use it.
-
7 Tax Blunders to Avoid in Your First Year of RetirementA business-as-usual approach to taxes in the first year of retirement can lead to silly trip-ups that erode your nest egg. Here are seven common goofs to avoid.
-
How to Plan for Social Security in 2026's Changing LandscapeNot understanding how the upcoming changes in 2026 might affect you could put your financial security in retirement at risk. This is what you need to know.
-
7 Tax Blunders to Avoid in Your First Year of Retirement, From a Seasoned Financial Planner
A business-as-usual approach to taxes in the first year of retirement can lead to silly trip-ups that erode your nest egg. Here are seven common goofs to avoid.
-
How to Plan for Social Security in 2026's Changing Landscape, From a Financial Professional
Not understanding how the upcoming changes in 2026 might affect you could put your financial security in retirement at risk. This is what you need to know.
-
6 Overlooked Areas That Can Make or Break Your Retirement, From a Retirement AdviserIf you're heading into retirement with scattered and uncertain plans, distilling them into these six areas can ensure you thrive in later life.
-
I'm a Wealth Adviser: These Are the 7 Risks Your Retirement Plan Should AddressYour retirement needs to be able to withstand several major threats, including inflation, longevity, long-term care costs, market swings and more.
-
High-Net-Worth Retirees: Don't Overlook These Benefits of Social SecurityWealthy retirees often overlook Social Security. But timed properly, it can drive tax efficiency, keep Medicare costs in check and strengthen your legacy.
-
Do You Have an Insurance Coverage Gap for Your Valuables? You May Be Surprised to Learn You DoStandard homeowners insurance usually has strict limits on high-value items, so you should formally "schedule" these valuable possessions with your insurer.
-
8 Practical Ways to Declutter Your Life in 2026: A Retirement 'Non-Resolution' ChecklistHere's how to stop wasting your energy on things that don't enhance your new chapter and focus on the things that do.
-
To Retire Rich, Stop Chasing Huge Returns and Do This Instead, Courtesy of a Financial PlannerSaving a large percentage of your income, minimizing taxes and keeping spending in check can offer a more realistic path to retiring rich.
