Stock market performance can alter strategy on retirement account withdrawals

Money Talk

Dear Liz: My husband and I retired three years ago, right before the stock market dive. We just sold our home and have moved into what used to be our vacation home. My husband wants to use $130,000 we made on our first home to pay down our mortgage on the second house (we owe $300,000 on the mortgage at 4.8% interest; the home is worth $600,000). I want to use this money to pay our living expenses for a while so that we can leave our retirement accounts alone, which would give them more time to build back up to pre-crash levels. Which is better?

Answer: Your approach is likely the smarter one.

People who retire in bear markets are in far greater danger of running out of money than those who retire in better times, according to analyses by mutual fund company T. Rowe Price. That’s because bear market retirees draw from a shrinking pool, and the withdrawn money isn’t there to earn gains when investment markets rebound.

In most years, retirees have an almost 90% chance of being able to sustain their retirement income over a 30-year retirement if they limit their initial withdrawal to 4% of their investment portfolios, increasing the withdrawal 3% each year to offset inflation, T. Rowe Price found. But poor market performance in the first five years of retirement can reduce that strategy’s chances of success from nearly 90% to just 43%. In other words, you would be more likely to run out of money.


The best way to cope with a downturn, the company found, is to reduce withdrawal rates 25% until the markets improve.

If the proceeds from your home sale were enough to pay off your current mortgage, your husband could make the argument that reducing your monthly expenses would in turn reduce the amount you’d have to withdraw from your retirement accounts. But in this case, paying down your debt won’t change your monthly costs.

What you really should do, however, is take this question to a fee-only financial planner who can review your situation and advise you about your next moves. You can find referrals to fee-only financial planners from the Garrett Planning Network at and the National Assn. of Personal Financial Advisors at

Short sale is no bailout

Dear Liz: It is appalling that the owner of the investment property discussed in your recent column is considering not taking responsibility for the debt that is owed. We shouldn’t be bailing out the people who chose to buy homes without considering that their income could change — and that property values could go down as well as up. Where is the bailout for the people who chose to make their investment in the stock market, on margin, and now have investments worth a lot less? You can choose to sell the stock at the loss, but you still owe what you borrowed.

Answer: You’re suggesting that everyone should have been able to predict today’s financial, real estate and unemployment situations. If that’s the case, your crystal ball is a lot better than anyone’s.

The first wave of foreclosures primarily affected people who never should have been approved for the mortgages they accepted, if sane lending standards were in place. If they should have known better, so too should their lenders. These days, however, many otherwise prudent people are getting caught in financial crunches because of high unemployment and the extraordinarily long duration of joblessness many face (the median duration of unemployment is currently over 20 weeks). And few of these homeowners are getting “bailed out.” Fewer than half a million homeowners have received permanent loan modifications through the government’s Home Affordable Modification Program.

The investor in question is considering trying to arrange a short sale of a rental property, in which the lender would accept the proceeds from the town home as settlement of the greater amount the investor owed. That’s not a bailout — there’s no government assistance involved. It’s a private contract renegotiation between two parties.


As for buying stocks on margin, remember that the investments in your brokerage account are collateral for any loan you get from a brokerage. If your account plunges in value, brokerages can and will sell equities in your account. “Bailouts” for investors buying on margin typically aren’t needed, because the brokerage usually makes sure it gets paid.

Liz Pulliam Weston is the author of the upcoming book “The 10 Commandments of Money: Survive and Thrive in the New Economy.” Questions for possible inclusion in her column may be sent to 3940 Laurel Canyon., No. 238, Studio City, CA 91604, or via the “Contact Liz” form at Distributed by No More Red Inc.