Bulletproofing Retirement

Another short side-trip away from Animationland.

During the last few months, longtime 401(k) participants have griped to me:

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"I hate to frigging look at my 401(k) accounts these days. Because everytime I go online or open up a statement, I find out my stock funds have gone down again ..."

I usually respond that those things happen in a sustained down market, so maybe they should look at their crappy returns less and just wade through the bad times dollar-cost averaging ... or maybe rebalance to a more conservative allocation ... or look at the swooning markets as "good buying opportunities."

For some reason, not everybody is reassured by my answers. When equity markets are going south, nerves get raw and hearts grow heavy.

And apparently older investors have similar issues about retirement bankrolls, because today the Wall Street Journey offered up a pithy article regarding various strategies that folks can use when stock values in their mutual fund accounts keep melting ...

... [F]inancial planners and researchers are warning clients that the timing of retirement -- in other words, the luck of the draw -- will largely determine how a nest egg will fare in the future. If you're fortunate enough to retire at the beginning of a strong bull market, such as the early 1990s, your savings might easily last for three decades. If you're unlucky enough to retire at the start of a bear market or recession -- say, early 2000 or late 2007 -- you could find yourself struggling financially for years to come.

Seems pretty obvious now, though maybe not so much back in 1999 when 401(k) participants were exulting over their fifty percent returns in their Plan's tech funds. Nine years further on, most people are less giddy and more nauseous over the ups and down of the market. Happily, the Journal gets down to useful specifics:

...[I]f you're withdrawing more than 10% of your nest egg's value each year, "never in history" has a portfolio lasted more than 19 years in that situation, says Jim Otar, an engineer, author and certified financial planner in Thornhill, Ontario. To find out the maximum remaining years for your savings, you would divide 160 by your withdrawal rate. To find out the minimum remaining years, divide 80 by the withdrawal rate. So, if your withdrawal rate is 12%, you'd have six to 13 years of savings left.

If you come up with ominous answers using any of these gauges, Mr. Otar recommends buying an annuity with all or part of your assets. What portion of your savings should go into an annuity? Probably more than you think. Although financial planners routinely suggest that retirees without pensions annuitize one-quarter or so of their savings to cover basic living costs, you probably need to annuitize closer to 100% of your savings if you're in danger of running out of money in a couple of decades, Mr. Otar says.

I'm not a huge proponent of annuities. If you work under the Motion Picture Industry Pension Plan, you're already locked into a monthly retirement check under The Defined Benefit part of the Plan. But I understand how everybody's retirement needs are different, and how managing investment accounts is not everyone's bag. So maybe another annuity is the right move for you.

But different industry workers have different issues. For the camera person or editor who's been gray-listed, there's the challenge of finding gainful employment until pension benefits and Social Security kick in. For the younger animation artist who's down-sized because of technological change, there's the question of whether to retrain ... or go into another field altogether where hard-won artistic chops can be used.

There's no one-size-fits-all solution, but most people will be forced at some point to come up with answers. The sooner you and I focus on what the questions are, the better off we'll be.

(Of course, one simple solution is to begin retirement in the first year of a two-decades-long bull market. When you figure out how to do that, drop me a line.)