If they are forced to sell beaten-down stocks and mutual funds to pay the bills, they could inflict permanent damage on their portfolios, increasing the risk that they will outlive their savings.
That’s what happened during the Great Recession. Standard & Poor’s 500-stock index lost more than half of its value during the bear market of October 2007 to March 2009, and IRAs and 401(k) plans lost about $2.4 trillion in value just during the final two quarters of 2008. Investors who rode out the downturn recouped their losses in the 11-year bull market, but seniors who took withdrawals before the stock market recovered were left with locked-in losses.
Ideally, you have prepared for this calamity by sequestering enough in cash or other low-risk investments that, when combined with guaranteed sources of income, you can cover at least two years of living expenses. “It’s the equivalent of an emergency fund within your retirement plan,” says Andrew Houte, a certified financial planner in Brookfield, Wis. You’re even better prepared if you’ve adopted the bucket system, in which you divide your savings into cash, short- or intermediate-term bond funds, and stocks, based on when you’ll need the money.
Cut expenses. After years of stock market gains and a roaring economy, some retirees and near-retirees may have forgotten the lessons of the Great Recession. David Mullins, a CFP in Richlands, Va., says he recently received a call from a retiree who had invested 100% of his savings in stocks. On one day in mid March, his portfolio lost more than $112,000.
If you find yourself in that unfortunate position, look for ways to cut expenses so you can postpone selling stocks or funds for as long as possible. Review your wireless bills for services you no longer use (or never requested). While you probably don’t want to cancel Netflix until you’re allowed out of the house, look for other subscriptions you can do without.
Low interest rates offer other opportunities to cut costs. If you still have a mortgage, refinancing to a lower interest rate could lower your monthly bill and free up some cash. If your mortgage rate is more than one percentage point above current rates, it’s usually a sign that it makes sense to refinance. For help crunching the numbers, use The Mortgage Professor’s refinance calculator to enter the details of your current mortgage and your new loan to see how long you’d have to stay in your home to start saving money with a refinance.
Look into a reverse mortgage. For homeowners who are 62 or older, a reverse mortgage could provide a reliable source of income until the market recovers. A strategy recommended by some financial planners, known as a “standby reverse mortgage,” is designed for just this type of downturn. Under this game plan, you take out a reverse mortgage line of credit to cover your expenses until your portfolio recovers. If you maintain your home and pay taxes and insurance, you don’t have to repay the loan as long as you stay in your home.
Low interest rates have made these loans even more attractive. Under the terms of the government-insured Home Equity Conversion Mortgage, the most popular kind of reverse mortgage, the lower the interest rate, the more home equity you’re allowed to borrow. And if it turns out you don’t need the money, your untapped credit line will increase as if you were paying interest on the balance.
Be smart about Social Security. If the Great Recession is any guide, there will soon be a spike in claims for Social Security benefits, both by people who were forced to retire earlier than planned and by retirees who are worried about depleting their investment portfolios. Filing for Social Security benefits will provide a guaranteed monthly paycheck, which could allow you to postpone taking money out of your retirement savings. You can file for benefits as early as age 62, but if you do, your benefits will be permanently reduced by at least 25%. If you’re married and are the higher earner, claiming early could also reduce the survivor benefits your spouse will receive if he or she outlives you.
Waiting until full retirement age — 66 or older for those born after 1943 — will allow you to claim 100% of the benefits you’ve earned. If you wait to file for benefits until after you reach full retirement age, your payouts will grow by 8% a year until you reach age 70.
Married couples may be able to play it both ways. Have the lower-earning spouse file before full retirement age — as early as 62. Although that spouse’s benefits will be reduced, you can use that money to pay the bills until your portfolio has recovered. Meanwhile, the higher-earning spouse will be able to put off claiming benefits until full retirement age or later.