Last Updated: September 28, 2009
If you didn't believe it before the economic crisis of 2008-09, you will likely it believe it now. "It matters when you retire as much as how you retire," said FPA® member, John Harris, Ph.D., CFP®, RFC®, president of Carolina Financial Planning.
According to Harris, who recently authored an article for the Journal of Financial Planning about the very same subject, markets move in long-run cycles. "In the United States, these so-called secular cycles have spanned long periods ranging from 15 to 20 years," he said. "Secular bear markets are periods where market values trend sideways or downward from the previous market high, and secular bull markets are periods where market values trend upward and surpass the market highs of the preceding cycle."
"And these long-run cycles in market performance have been linked to widespread commercial application of technological discoveries such as steam, railroads, automobiles, electrification, and digital processing," Harris said.
Equally, if not more important, is what these cycles mean to your retirement. "Retirements starting at the beginning of a secular bear market will incur lower investment returns," Harris said. "On the other hand, retirements starting at the beginning of a secular bull market will enjoy higher investment returns. Consequently, the performance of retiree investments and the portfolio balances available to fund retirement expenses will depend on when the retirement period begins."
Besides being aware of retirement date and the current market cycle, Harris said it's important to review what he calls a safe withdrawal rate (SWR). "A SWR is the percentage that can be withdrawn annually from your investments and still sustain the portfolio for the entire retirement period," he said. "Because of differing investment performance during secular bear and bull markets, market cycles affect the SWR."
"In general, research suggests SWRs are around 3 percent during secular bear markets and 5 percent during secular bull markets," Harris said. "You should be aware that secular market cycles will affect your investment performance and your available funds to cover retirement expenses. Consequently, the SWR strategy should consider when the retirement starts."
Find a financial planner who can help you create a safe withdrawal strategy.