Reuters Money

The past decade produced a rare event — two vicious bear markets that wrecked the plans of many retirement investors. The impact was especially severe for those close to retirement, or already retired. What, if anything, could retirees have done differently to avoid running out of money in retirement — and what could they do differently in the future?

T. Rowe Price examines this question in a new study that uses Monte Carlo probability analysis to look at likely outcomes of different retiree responses to a bear market. T. Rowe examined strategies that would help retirees restore their odds of success — defined as not running out of money before age 95.

The key finding: retirees struggling in the past decade could boost significantly their odds of success by adjusting their withdrawal rates.

If that sounds to you like a fancy way of saying “tighten your belt,” you’re be right. Our economy and markets are struggling to recover from the worst financial meltdown since the Great Depression, and there really are no magic bullet solutions. The answers all require sacrifice, adjustments and hard work.

Strong planning focuses not just on the first few years of retirement, but on long-term retirement security — how to reliably generate income to support a retirement that could last 25 years or more for you or your spouse.

The T. Rowe Price analysis underscores a key point about retirement planning in hard times: Income and assets are just one set of values in the retirement security equation; on the other side is lifestyle and spending.

The analysis starts with a hypothetical worker who retires on January 1, 2000, with a $500,000 portfolio invested 55 percent stocks/45 percent bonds. Four withdrawal strategies are analyzed using Monte Carlo probability analysis to understand the likely impact on the portfolio using actual returns for stocks and bonds in the following ten years — including the deep bear markets of 2002 and 2008-2009:

Classic decumulation: The retiree withdraws four percent ($20,000) in the first year, and increases the annual withdrawal amount by three percent each year to keep up with inflation.

Temporary reduction: Withdrawals are reduced by 25 percent for three years after each bear market bottom (from 2002–2005 and again from 2009–2012).

No inflation increases: The COLAs are cut three years after each bear market bottom (from 2002–2005 and again from 2009–2012).

Bail on stocks: The investor switches to a 100 percent bond portfolio at the end of the first bear market in September 2002.

The 25 percent belt-tightening produced the best long-term result; by the end of 2010, the retiree’s odds of maintaining withdrawals up to age 95 (the remainder of the retirement period) jumped to 84 percent. “This really boils down to cutting back on what you withdraw — but not everyone can stomach that big of a cut,” says Christine Fahlund, senior financial planner at T. Rowe Price. “So, the next best thing is not to increase your withdrawal amounts for inflation.”

In that scenario, the odds of success were restored to 69 percent.

“Many of us think it’s impossible to cut our spending, but the truth is we live in such affluence that we can cut if we absolutely have to,” she adds.