A Simple Solution for Retirees in Bear Markets

SmartAsset has published a new analysis that weighs the impact of current market conditions on the retirement experiences of multiple hypothetical investors, with the goal of assessing the power of reduced spending on a portfolio's durability during bear markets.

As the analysis points out, equity and bond markets have stumbled dramatically in 2022, officially entering bear market territory. The conditions have left many retirees and soon-to-be retired workers wondering whether they will be able to adequately finance their golden years.

According to SmartAsset, for people in this position, there are a number of ways to approach this uncomfortable investment reality. The first is to have already prepared in advance for volatility by embracing a bucket strategy, in which the retiree segregates a portion of their accumulated assets into cash or cash-like investments sufficient to fund between one and three years of living expenses.

Armed with this cash bucket, the investor will not need to sell equity assets at a steep loss to fund current spending needs, thus giving the portfolio time to recover before it becomes the source of income. Such an approach is obviously best suited for those investors with substantial assets and access to advanced planning resources.

Another option for those with fewer assets — or those who have otherwise not adequately prepared their investment portfolios for a sudden downturn — is to attempt to work longer. This can be a powerful option, as well, but it is not always feasible or desirable, depending on the individual facts and circumstances.

Perhaps the method most directly in the control of any given retiree, as noted by SmartAsset, is the effort to cut down on living expenses in retirement. The analysis posits that lower spending in retirement is one of the most impactful ways to protect retirement savings during difficult moments in the market.

Cutting expenses won't be easy for many, the analysis holds, but even fairly modest reductions in spending can make a big difference over time. In fact, according to SmartAsset, it may take as little as $250 or $500 in reduced monthly expenses to significantly extend the life of a given investor's portfolio.

The Power of Lower Expenses

SmartAsset's analysis considers three hypothetical retirement portfolios to determine the potential impact of spending reductions on long-term retirement outcomes. Each hypothetical retiree starts the analysis with $500,000 in accumulated assets, but their monthly spending rates differ by $250.

For purposes of simplicity, SmartAsset's analysis assumes that the accounts in question don't carry required minimum distributions and that the retirees are withdrawing only what is needed to live in retirement. The analysis also assumes Social Security payments won't be interrupted in the future, and that the accounts are operated like Roth IRAs, in which no taxes are due upon withdrawal.

The analysis posits that Retiree A withdraws $2,559 from her $500,000 account in her first month of retirement, and that her expenses swell 2.2% annually each year after that. According to SmartAsset's calculations, this individual's savings will last some 258 months, or 21.5 years. Thus, if she retires at age 65, she'll be about 87 before her funds run out.

Retiree B withdraws a lesser amount of $2,309 from her $500,000 account in the first month. Running with the same assumptions, this individual's savings last 297 months, or 24.75 years. So, if retiring at 65, Retiree B will run out of cash right around age 90.

Finally, Retiree C finds a way to shave $500 from her monthly expenses. Her first withdrawal is $2,059 per year and her annual inflation rate is 2.2%. According to SmartAsset's calculations, this person's savings will last 351 months, or 29.25 years, so if she retires at 65, she will be around 94 by the time she exhausts her account.

Where to Cut Costs in Retirement

SmartAsset concludes from these numbers that cutting expenses is a clear way to respond to the current challenges in the market, and the analysis offers some specific suggestions on where such reductions can be achieved.

One key area is in the reduction of housing expenses. Retirees could consider downsizing, taking on short-term renters or moving in with family, the analysis proposes. Retiree couples may also be able to sell a car, as many retirees find they drive less or have more flexibility in terms of required daily commuting.

Other areas of savings are obvious, such as cutting travel and vacations. Retirees can either eliminate travel all together, or they may consider traveling at non-peak times or taking off-beat vacations. As the analysis points out, the reduction of spending can often be achieved by modifying lifestyle expectations rather than completely eliminating them.

According to SmartAsset, some retirees may find they can achieve significant monthly or annual savings by re-shopping for key insurance services, and by ensuring the insurance being purchase is appropriate for their current lifestyle.

The analysis concludes that, if people are looking for ways to finance their desired lifestyle on a fixed income, they could consider hiring a financial advisor. An advisor may be able to help them understand where there is room for cuts in the budget and make grounded calculations about whether they can afford to retire on schedule.