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The market may be ready for an adjustment and you and your retirement plan should be as well.

We know that sooner or later, there will be a market correction. However, if you are getting anywhere near retirement, you need to be prepared to make adjustments to your retirement plans, according to the Associated Press in “How to reset retirement plans to weather a downturn“.

It’s a challenge since the market has quadrupled since 2009, when the recovery from 2008 got underway. Returns on bonds and cash remain low. If you haven’t rebalanced your portfolio in a while, it’s likely you have a high degree of exposure to equities.

The rebalancing should be done now, before markets begin any roller coaster rides and rational thinking tends to go out the window. The proper asset allocation depends on your income needs and your risk tolerance. Financial planners advise people to have a few years’ worth of withdrawals in safer, low-risk investments, so they are not asking to sell everything when markets adjust.

One planner has his clients keep one to three years’ worth of expenses in case, plus seven to nine years’ worth in bonds. As a result, they have 10 years before they need to sell in the event of a correction.

You never want to sell into a correction, but many people panic and do just that.

Some advisors are sticking with the 4% rule, which says that retirees can minimize their risks by withdrawing 4% of their portfolios in the first year of retirement and increasing the amount in years after that, by the inflation rate. Many think this rule will not work in an environment of low returns.

Another approach is to completely forgo inflation adjustments in bad years. If you start at a 4.5% withdrawal rate, and then trim spending when portfolios lose money, that may be more flexible.

Reducing expenses and maximizing Social Security benefits is a smart approach for retirees. The more guaranteed income you have, the less risk you need to take in your investments.

Retirees have all the money they need in a perfect world based on their own investments, retirement accounts and Social Security.  However, if they don’t, they can create more income by purchasing a fixed annuity or tapping the equity in their home through a reverse mortgage.

Reference: Associated Press (Aug. 20, 2018) “How to reset retirement plans to weather a downturn

For more information on elder law, asset preservation and estate planning, please visit my estate planning website.

Mr. Amoruso concentrates his practice on Elder Law, Comprehensive Estate Planning, Asset Preservation, Estate Administration and Guardianship.