Retirement Financial Strategies that Didn't Pass a Bear Market Test

The economic crisis of 2008 has stress tested many retirement financial strategies. Here are some I don't think are passing the test.

Being fully invested in the stock market. With long term stock market returns averaging 8-10% returns, it was considered imprudent not to be invested in equities. During the bull market, people also tended to overweight equities, to the extent of being fully invested. The trouble is that people forgot to also consider year to year volatility. I expect few retirees planned for the possibility of the market being down 10%. Probably, no one planned on the market being down over 40% in a single year.

Our solution: Keep at least 2-3 years of expenses in cash or cash equivalents. Fortunately, we were a bit more cautious in our first year of early retirement and had set aside 4-5 years of expenses.

Using a house as retirement savings. I am always amazed when people tell me their house is their retirement savings. First, a house is very illiquid. Second, I have rarely seen people sell their house when retiring. The housing bubble provided a third reason. The house can fall in value.

Our solution: We don't count our house as part of our retirement savings. If we get money from our house, we'll consider it a bonus.

Over stretching financially during good times. During a bull market, it's easy to be optimistic, to the point of over spending through higher withdrawals or mortgage refinances. Unfortunately, if costs increase permanently, then expenses are hard to reduce during hard economic times.

Our solution: Consider lowering our withdrawal rate to maximize how long our retirement savings will last. I will bring this up as a topic with our financial advisor at our next meeting.

For at least the next year, I believe our strategies should focus on preserving assets, including not selling stock when the market is down. However, should the market rally significantly, I will take the opportunity to sell some equities to create cover at least one more year of living expenses.

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This is not financial advice. Please consult a professional advisor.

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