Folks at retirement age worried about starting to draw down asset
There has been some discussion recently about the hurt that some retirees may suffer if they retire at a time of down markets and start drawing down their assets when their equity-based asset prices are at low levels, which requires selling more than the expected number of shares in order to produce the amount of money that one needs on which to live.
Many advisors have suggested that retirees should have a low level of equity-based assets, e.g. subtract your age from 100, if age 65, the difference is 35 ... such a person should have about 35% of one's asset in such assets, which havea tendency to fluctuating prices.
Most of you who are 65 expect to live for much more than another 10 years, and many advisors claim that people have a good possibility of producing substantial growth in quality equity-based assets that one expects to let run for over 10 years., even better if one expects to let it run for an extra 15 - 20 years or so.
If one expects to live to 100, a possibility - and one does not want to run out of money when one remains alive - that is seven blocks of 5 years each.
As the asset that one uses to live on is no longer present to continue to earn, and as the prices of goods that one needs to sustain life will most likely rise over the next 30 years, it's important to not use the whole amount of one of those seven blocks in the first five years ... probably best to make it stretch to ten years. That's even more true, in that one usually needs to expect an above average level of expense late in one's life to pay for increased illness, nursing home fees, etc.
That would mean that up to about 85% of one's asset would still be operating in 10 years time ... thus one could consider having most of it invested in equities.
When one has retired and needs to use invested assets to sustain life ... but stock markets are down, it's a good idea to use some of the assets that one has where the value of the invested dollars does not change.
If one does not have such constant-dollar assets at such a time, is it wise to liquidate stocks when price levels are heavily discounted?
If you evaluate the speed of rising prices of the stock market following earlier substantial drops, you'll find that the market seldom stays down for more than a couple of years. When it begins to recover, usually there is substantial gain which happens rather quickly, for two or three years or more.
If you use some stock and mutual fund certificates as collateral to set up fully-secured Line of Credit, in current circumstances you may well be able to borrow at a rate of 5 - 7% or so.
If you use the proceeds of the loan for investment, usually the interest cost is deductible, but if for consumption, usually that cost may not be deductible. If you have such a Line of Credit for investment now, likely best to keep the one for consumption entirely separate, if interest on one deductible, not on the other.
However, if you pay 6% annual rate on your loan for consumption and after a couple of years you can sell some stocks to pay off the loan that have gained 25 - 30%, (and sometimes even more) which has not been unusual in past recoveries, I doubt that you would be complaining.
Considering that there are some current difficulties that may result in recovery being somewhat delayed, and the rate of increase being slower than in earlier occasions, the value of holding the stocks through to substantial recovery may be lower than in earlier times, I think that it is none the less worthy of consideration in the current situation.
For those of you unfamiliar with my situation, I've been a personal financial advisor for about 25 years, am now at 80 years of age about 80% invested in equity-based assets. As I, living frugally from choice rather than necessity (I'm driving a 21-year old car, standard tranny, and turn off ignition when I see a traffic light go yellow a half block ahead) am living on somehat less than my three pensions plus small payout from tax-deferred retirement account, I have not been greatly distressed to see my asset base shrink by about 30% in the past couple of years, as I expect it to recover, given time.
A 42-year investment doubled 4.5 times till June '07, with proportionate increase in dividend rate ... and about 3.35 times at the low point of the market when (largely due to exposure to the stinky U.S. mortgage market) it sank by over 50% (but there has been no decrease in the dividend - so now it's paying 6.78%, which was over 10% at the low point of the market).
No GIC or bond has developed a long-term growth rate anywhere near that - and in Canada, both of these increases have been at a much lower tax rate than on interest income.
Just some ideas for your consideration as you plan retirement if it's to begin about now.
It's entirely up to you what you may choose to do about it.
Good wishes for a happy, healthy, interesting and useful retirement.
Now that you have some extra time available ... please consider that...
... learning how money works is an interesting hobby ... and **it pays well**!!