"Let it Be:" But How?

By Gary Silverman, CFP®

So, how do you set yourself up so that a crash, recession, or bear market won’t derail the plans you have for your investments?  Last week, we mentioned the standard you’ve heard from me often enough: The safe withdrawal rate. But what if the safe withdrawal rate doesn’t leave you with enough money?

Some folks will say to just take more risk. Add more stocks to the portfolio because, after all, they have consistently higher returns. This is true, but the problem we are trying to deal with is how to keep the cash-flow up when the market tanks. Having more money in the stock market is a bit counterintuitive here. But there is a way.

Let the stocks ride.

If the stock market drops a rock off a cliff, just don’t touch them until the market recovers and makes a decent return. “Uh, but Gary”, you might say, “What do I live on?” That’s where a buffer comes into play. Whether it’s a bond ladder, CDs, or just a pile of cash, that’s what you live on for the first many years of a market debacle. By the time that money runs out, your stocks (likely) will have recovered, and you can start enjoying them.

Other strategies involve using the cash value in a life insurance policy or a reverse mortgage to get you through the rough patch. Of course, this requires that you had built up value in the policy or house across your lifetime. Many people don’t have that luxury.

There are ways using option strategies (or the much easier way of using ETFs for mutual funds that themselves use said strategies) to have your cake and eat it to. You’d be in stocks, but the downside would be muted. One little problem is that the upside might also be muted, or your portfolio could be more expensive to run, so there’s that.

All the above is designed to allow you to have more money in the risky stuff (stocks) while still being able to eat should that risky stuff take a few years off.

But the easiest way to allow a higher withdrawal rate without taking too much undue risk is to be flexible.

For most of you reading this, there is a lot of give in your budget. You don’t have to take a vacation this year. You don’t have to replace the car right now. You don’t have to do a lot of things. So, when the market dives, stop some of your spending. My experience is that most people do this naturally. With the pressure taken off the portfolio a bit, you can let the portion of it that’s in stocks recover while spending down the other pieces.

When things get back to normal, you can sell some of the recovered stocks, rebalance your portfolio, and go on that cruise.

All of this takes quite a bit of thought and planning. Look up names like Pfau, Kitces, or Bengen who have thought about much of this for you. Or, if you have an advisor, get them to advise.