Tahoe-Truckee Market Beat: Managing retirement distributions
Special to the Sun
The stock market goes through cycles of volatility known as regime change. The market spends about 85 percent of the time in a phase of low volatility with rising prices, and the other 15 percent of the time in a high volatility phase with falling prices.
Periods of high volatility are known as corrections or bear markets depending on the time frame.
If you’re taking income distributions from your account, you need to be careful not to withdraw too much during market downturns, as it can become difficult for your portfolio to recover.
Taking income from equity mutual funds through a systematic withdrawal plan can lead to some serious depletion in your portfolio.
One solution is to have income producing investments in your portfolio and just take the income produced in the form of dividends and coupon payments.
For example, say you’re retired and have a 50/50 stock and bond portfolio, you could take your income from the bonds and hold the stock portion for long term gains.
By rebalancing periodically, you’ll transfer some of the gains from the stocks into the income producing bonds and hold the stocks through market downturns.
Another strategy is to design the income portion of your portfolio to fit your needs with a combination of bonds, dividend paying stocks and high yielding ETFs.
By just withdrawing the income they produce, you can rely on a steady stream of cash and have the ability to hold those investments through the inevitable market downturns.
A common rule cited by planners is the 4 percent rule. The way the 4 percent rule works is that in your first year of retirement, you will withdraw 4 percent from your portfolio for income.
The next year you will withdraw 4 percent plus an inflation adjustment taken from the CPI. If you follow that rule, you have a 95 percent probability that you’ll get that income and not tap into your principal balance.
During market downturns, be especially careful about taking systematic withdrawals from equity mutual funds for income, as they can get depleted.
You may want to consider other income producing strategies that will provide dependable income and can help lower your stress levels during the inevitable market downturns that will occur periodically.
Kenneth Roberts is a Truckee-based Registered Investment Advisor. Information is at his blog at http://www.sellacalloption.com or 775-657-8065. The mention of securities should not be considered an offer to sell or solicitation to buy investments mentioned. Consult your investment professional to understand the risks and/or how the purchase or sale of these investments may be implemented to meet your investment goals. Past performance is no guarantee of future results.