What retirees can learn from the market slide

New York, May 17: IT’s like the old joke about the barnyard animals that get together to discuss a gift for the retiring farmer. The chickens suggest supplying eggs and bacon for life.

“That’s easy for you to say,” the pigs protest. “You may be participating. But we’re involved.” So it is with the past year’s stock-market plunge. All shareholders have participated in the stomach-churning decline. But the real agony belongs to retirees, who are living off their portfolios. What can these folks learn from the market tumble? Here are some thoughts:

Counting On Cash: As the market approached last year’s dizzying peak, I heard from retirees who thought it was fine to keep their entire portfolio in stocks. The rest, as they say, is history. “Market declines are an opportunity for savers, because they can pick up stocks at a low price,” says Henry Hebeler, author of JK Lasser’s Your Winning Retirement Plan. “But they’re a disaster for retirees. If your stock portfolio went down 30%, you withdrew 7% and you lost 3% to inflation, you’re down 40%.”

The pain isn’t over yet. It’s been more than 13 months since Standard & Poor’s 500-stock index peaked, and the index is still 18% below last year’s all-time high. Shareholders, I suspect, may not fully recoup their losses until 2002 or possibly later. Even then, retirees would want to wait before selling stocks, so that they have some gains to show for all their suffering.

Tightening Your Belt: Even if your investment losses haven’t been too steep, the combination of a declining market and your own spending could still devastate your nest egg.

How much can retirees safely pull out of their portfolio each year? Answers vary. But as a rule of thumb, aim to spend no more than 5% of your portfolio in the first year of retirement; thereafter, you should step up the annual amount you withdraw along with inflation. Any dividends and interest you receive count toward the 5% target.

Fending Off Inflation: While the past year has revealed the perils of stock investing, it has also highlighted the persistent threat from inflation. “If you really want to know what’s hurting clients, it’s the rising cost of energy, not the markets,” says Richard Van Der Noord, a financial planner in Macon. Because of inflation, retirees shouldn’t shy away from stocks.

-- The Wall Street Journal