Is 2022 a Bad Year to Retire? 2 Ways to Protect Your Retirement

Is 2022 a Bad Year to Retire?

A bear market can be scary for retirees, but by following these two principles you can gain confidence and sleep well at night.

Is 2022 a Bad Year to Retire?

bad year to retire

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Full transcript:


Alex Okugawa & Anthony Saffer

Anthony Saffer 0:00
A bear market can be scary for retirees. Today, we want to give you two principles to help you gain confidence and sleep well at night. Stay tuned.

Hey there, it’s Anthony and Alex from One Degree Advisors. And if you’re new here, we’re Certified Financial Planners, we help folks with all things retirement, tax, and investments. So Alex, let’s get into it when people retire, they understandably want to do so at a good time when the stock market’s good and when the economy is humming along.

Alex Okugawa 0:31
Yeah, there’s a good reason for that. And that’s because retirees who experienced a bear market in the early years of their retirement, the performance is a lot worse, and it can be detrimental to their plan. So let’s take a look at this example from BlackRock, okay, what you’re looking at is three different portfolios. And if you look at the top column, on the far right-hand side, you’re gonna see the average annual return between all three portfolios is 7%. Okay, so the exact same rate, now the path of how they get it is completely different. Portfolio A has great returns in the beginning and then has those negative returns at the end, Portfolio B is just an even 7%, across the board every single year. And then portfolio C has negative returns in the beginning and then has great returns at the end. And this is what folks fear, right? I’m going to have negative returns at the beginning of my retirement, and it’s going to negatively impact my portfolio and longevity through retirement.

Anthony Saffer 1:34
So having a bear market shortly into retirement can be a scary thing. So someone that retired, for instance, last year, and now we have a tough market or even back in 2006 2007. Now, we can’t really control that when it happens. But there are things we can do to combat that.

Alex Okugawa 1:51
Now you’ll notice in the illustration that we’re looking at, it’s just an average of 7% across the board. And it’s every single year like the returns are a little bit different. The thing is that you don’t have to blindly sell your investments proportionally every single year. And this is an example of where technology can be a blessing or it can be a curse, right? Technology allows you to manage a portfolio very efficiently and very systematically. But if you’re not being strategic, and you’re not thinking through this D cumulation phase in retirement, it can be a detriment. Why would you want to proportionately sell your stocks in a down market, maybe you want to sell things that have held up their value a lot better in retirement? So let’s take a look at an example here and pull this chart up. This is comparing the s&p 500 versus a Vanguard short-term bond fund. And we’re looking at the performance year to date. So this is going from January one through September 30. And what you’ll notice is that the s&p 500 is down nearly 24% through the end of September. Now short-term bond funds definitely have still had a rough time this year, bonds are on pace for their worst year in several decades. But with that in mind, they’re still doing a lot better than stocks. So that’s where a good advisor can come in and say, I’m not going to touch the stocks, I’m not going to steal those. Let’s give those times to give them time to recover because we know long term, these things happen in stocks they do is not fun. But these things happen. Meanwhile, I can create your income from the short-term bond funds, which have held up much better that can help with the sequence of return risk early in the years of retirement.

Anthony Saffer 3:39
Yeah, the reality is a retiree is not is going to have several bear markets as they go through their lifetime. So be prepared in advance is really important.

Alex Okugawa 3:48
Most people watching have gone through bear markets before the differences, they just may not have gone through a bear market in retirement. And so that’s really tough. And that’s where having a comprehensive plan that’s taking all this into consideration that’s been stress tested. And having a customized investment plan to help through this D cumulation of life can honestly really make a difference for a retiree.

Anthony Saffer 4:11
So mitigating that sequence of returns risk is really important. It can be controllable to one extent as far as taking from stable assets, what’s another thing that retirees can do to improve their situation?

Alex Okugawa 4:21
So a lot of people are familiar with withdrawal rules called the Safe, safe withdrawal rate of 4%. A lot of people are familiar with that what a lot of people don’t know is that that rule states, you can increase your withdrawals every single year by the rate of inflation. And so that can be really challenging this year when you have big negative performance numbers and really high inflation numbers, right? So retirees again, may not want to just blindly say Well, that’s what the rule said. Let me take my withdrawal. If you can do so a retiree may say you know what, I’m not going to increase my withdrawals by the rate of inflation. I’m just going to keep going gonna keep it the same that can help the portfolio so you’re not increasing it by eight 9% of the inflation that we’ve seen so far this year.

Anthony Saffer 5:06
Yeah, that’s a really good idea. We recently posted a video on three retirement withdrawal strategies during a bear market. People can dig in further and learn a lot about this very important topic. Absolutely. are you delaying retirement because of the economy in the stock market this year? Leave your thoughts in the comments down below. And if you liked today’s video, please like and subscribe for more. Thanks for watching.

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