Don’t Lose Your Nerve

Don’t Lose Your Nerve

June 21, 2022

Q: I was planning to retire this year, but the stock market has me feeling nervous. Do you think it would be better for me to keep working until things settle down?

A: Retirement is tricky business. Most people look forward to ditching the pressures of work for a more relaxed lifestyle, but it takes a real leap of faith to step away from a steady paycheck, especially when a bear market is chewing away at your retirement accounts. I'm going answer your question in two parts. The first deals with how to handle bear markets generally; the second relates to the timing of your retirement.

Part 1: My friend Lora lives in Fairbanks, Alaska. She and her husband first moved to Alaska twenty years ago when she got her dream job as a ranger at Denali National Park. She loves Alaska's backcountry despite its many dangers. Recently, on two separate occasions, she has been charged by grizzlies while hunting. How did she respond? She kept her cool and stood her ground. She knows you can't outrun a grizzly and trying would only invite an all-out attack. These were bluff charges and both times the bears veered away at the last moment.

There are parallels here for dealing with bear markets. When a bear market is coming at you, it might feel like your world is about to end. However, if you keep your cool and stand your ground—meaning you maintain your investment discipline—chances are good that you will be okay. Of course, this presumes that you are properly invested in a well-diversified portfolio of high-quality assets. If you have any questions or concerns about the quality of your portfolio or the way it is structured, I encourage you to consult with a knowledgeable advisor.

Part 2: Financial planning for retirement focuses on three general areas: 1) Do you have enough resources to support the lifestyle you desire? 2) Do you have sufficient reserves to be able to handle the health challenges that come as we age, including possible long-term care needs? and 3) What money or property do you want to leave for your heirs when you die? If you have not done a financial plan for retirement, I encourage you to find a reputable financial planner who can help you sort through these three questions.

One of the toughest financial decisions you will grapple with in retirement is how much to withdraw each year from your savings. If you withdraw too much, you will outlive your assets. If you withdraw too little, you will have lived below your possibilities. Both outcomes are less than optimal. Instead, financial planners try to find the middle path, something we call the "safe" or the "sustainable" withdrawal rate.

In 1994, financial advisor William Bengen published an article in the Journal of Financial Planning on safe withdrawal rates. Based on historical data starting in 1926, Bengen observed that a person who withdrew 4 percent of their portfolio's value in the first year of retirement and then withdrew that same dollar amount adjusted for inflation every year thereafter, would never run out of money over a 30-year time horizon. This result held up even when retirement was followed by a crushing bear market, like the 1929 market crash.

Bengen's insight was quickly adopted by industry practitioners who dubbed it the "4 Percent Rule." Over the past 28 years, Bengen's research has drawn plenty of criticism by those who have questioned his assumption or who felt his methodology wasn't rigorous enough. Still, the 4 Percent Rule has persisted and has become a commonly used rule of thumb—a good starting place for most discussions about safe withdrawal rates.

So, in answer to your question about retiring now versus waiting, I would ask if you have enough savings at current market value to support your desired retirement lifestyle if you were to follow Bengen's 4 Percent Rule? If so, why wait? If not, what's the rush? In either case, a good financial plan will help you approach the retirement decision with greater clarity and confidence.

Steven C. Merrell MBA, CFP®, AIF® is a Partner at Monterey Private Wealth, Inc., a Wealth Management Firm in Monterey. He welcomes questions that you may have concerning investments, taxes, retirement, or estate planning. Send your questions to: Steve Merrell, 2340 Garden Road Suite 202, Monterey, CA 93940 or email them to