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What should I do if I’m retired and a market decline puts my plan in jeopardy?

For younger investors, time is on their side to capture the benefits of an eventual financial recovery. But what does it mean to retirees who need their nest eggs now? Kevin Grogan explains.

Transcript

Tim Maurer:
Tim Maurer back with another episode of Ask Buckingham, a new video podcast designed to bring clarity in the midst of confusion by connecting your great personal finance questions with straightforward answers from industry thought leaders.

Tim Maurer:
Today’s question will be answered by Aaron Grey, longtime wealth advisor and Buckingham’s Director of Planning Integration. Aaron, this one’s a doozy. What should I do if I’m retired and a market decline seems to put my long-term financial plan in jeopardy?

Aaron Grey:
That’s a great question. I think the first and most important thing when examining that specific topic is first understanding that almost no retirees have a stock portfolio, 100% stock portfolio. You want to understand that there’s a lot of different things in your pie, and by design in retirement, there’s going to be assets that we can go to to create income that can continue to float you in retirement that have nothing to do with the stock market. So if the stock market is down 25%, 30%, that’s obviously going to have an impact, but maybe that’s only half of the portfolio. There’s other assets in there that we can lean on during these times.

Aaron Grey:
So, with that in mind and kind of understanding that near term where there’s certainly a game plan in place to continue the current income. The fact of the matter is these are tough times, and as I said, any kind of stock market draw downs like we’re seeing now are going to impact anybody’s portfolio that owns any percentage of stocks.

Aaron Grey:
So here’s one thing that we can do, is our routines are all upside down right now. Everybody’s working from home, feeling stuck at home, not able to do what they’re normally doing, travel plans are on delay. Everybody’s routine is a little bit backwards, so use this as an opportunity to re-examine your life, your spending. What are you doing? The plans that you have, the spending that you’re planning on doing in retirement, is that really in line with what is most important to you?

Aaron Grey:
Reevaluate the values, the personal values that you have where we’re all showing concern for one another, for those that are sick, for our healthcare workers. Revisit that, get in touch with how you’re feeling and revalidate that is there something new that we should be thinking about in terms of pursuing joy in your life and really the spending that supports the joy in your life.

Aaron Grey:
One thing that I think is really helpful that I’m talking through with clients now is looking at the different categories of spending or maybe just pulling out a credit card statement and looking at the different transactions you’ve had for last three months. Get three different colors of highlighter. One for something that you would say is a need and I got to have, one that is something for a once, I enjoy this, this does bring joy to my life. I’d like to continue to do this if I could. One that’s kind of more in a wish category, where this is something that I really do enjoy, but if I had to let it go, we could certainly get by and continue to live a happy, fulfilled life.

Aaron Grey:
Then sit back, after they’re all highlighted, put it on the table and stand back and look at the colors. How much of one color do you have versus another? Are you really being honest with yourself about one’s something being a wish versus a want versus a need? Really just kind of reexamining what is behind these goals that I had within my retirement plan and do they all really still need to be there? If the answer is yes, then great, then we can revalidate that and understand and kind of make a plan moving forward.

Aaron Grey:
But I think it’s really interesting as we’re all kind of topsy turvy now and out of our routines to go back in and give yourself the permission to re-ask the question about whether or not what you plan for is still what you want.

Tim Maurer:
I love this idea of re-validating the plan, almost going back to the drawing board with some of that extra time that we all have on our hands these days to look at the motivation behind our plan, as well as the numbers themselves. But what if after doing this revalidation, I find that that number that I was looking for in terms of my income is not necessarily going to be sustainable after taking a meaningful hit from the market?

Aaron Grey:
That’s another really good question. Let me tell you, there’s two really bad times to examine a financial plan and really anchor to it. The two bad times are when you’re at a all-time stock market high and another bad time is when you’re at a major league stock market low. You’re not doing yourself a lot of service, really in either direction.

Aaron Grey:
So take that with kind of a grain of salt, that certainly it is an opportunity today to look at your plan right in the midst of one of these stock market headaches that we always during regular times we’re running an analysis of your plan saying, “Hey, the purpose of testing your plan is understanding and making sure that we can live through a lot of curve balls and storms that the markets may throw at us over time.”

Aaron Grey:
We’re in the middle of one of those storms right now, so you can certainly learn something by looking at your plan right now. But as you look at it, understand that the markets can and will recover, this too shall pass. However, if you look and you’re just not comfortable with it, numbers just really aren’t adding up and you have some guidance from your advisor saying, “Yeah, this just isn’t as strong as it was before, let’s talk about things we can do to make this plan a little stronger.”

Aaron Grey:
There are some things that are really not that painful you can do. We lived this 12 years ago during the credit crisis. Let’s look at, for example, let’s look at your travel budget. You’d like to travel and $15,000 a year is what we’ve slotted in for the next 15 years of retirement for travel. What would you think about domestic travel rather than international travel? What would you think about maybe every other year rather than every single year for this travel?

Aaron Grey:
What I can tell you in practice, Tim, is we did that and we did that in 2008, and we assumed that it was just going to be every other year, international travel for the next 15 years. We were all willing to do that and the clients were certainly willing to compromise and kind of make that part of their plan moving forward, and we thought that would be the way it would last forever. In that specific case, it was just two, three years later and everything had cured itself and we could go back in, and the plan was overly strong at that point and we could put in the annual travel then. It really ultimately became just a temporary change.

Aaron Grey:
So those are the things that you want to be willing to do, you don’t want to just make it a pass fail when you’re looking at your retirement. That’s why you want to have different goals and categorize them in your needs, wants, wishes, category, because then it makes it very easy to go in and say, “Okay, well, this little category here, it’s easy for me to tweak that number and let’s see how that may impact the plan and make things look a little bit stronger than they were when we opened up the plan and the market was down 30%.”

Tim Maurer:
Sure. Well, and I guess it also just makes sense, right, that if we see markets expanding significantly over the course of a couple of years, that might be the good year to take that international trip. When we see things constricting a little bit in the market, in the economy, that might be a good time to tighten the belt. Does that make sense or is that an oversimplification?

Aaron Grey:
Yeah, simple is good, Tim. That’s a great way to think about it. If the markets are outpacing our assumptions and our expectations and it’s been a particularly good year, then that is a great year to have that conversation. If it’s the trip or if it’s the gift to the grandkids or whatever the case may be, those are great times. If you can have flexibility in your retirement plan to say, “Yeah, let’s spend a little more when we know that we have a little extra profit this year from some good news in the markets, or let’s have the ability to reign it in a little bit and spend a little bit less in the next year when things aren’t quite as good.” Boy, those are the ingredients of a really dynamic, strong retirement plan.

Tim Maurer:
Well, thank you so much, Aaron, for giving us more of a sense of control, or at least over that which we can control in the midst of these types of crises. Thank you for tuning into this episode of Ask Buckingham. If you have a question that you’d like to see us address, you can do so by navigating to the website, askbuckingham.com or by emailing your question to question@askbuckingham.com, or just click in the corner of your screen and it’ll take you directly to the website.

Tim Maurer:
Remember that there are no dumb questions per se, but unfortunately, there are plenty of poor answers out there. Our hope is that in giving you straight answers to your questions, it will bring a sense of calm and allow you to apply what you’ve learned in pursuit of good decision-making. So please follow us, and by all means, Ask Buckingham.

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