To the uninitiated, a crash proof retirement can seem like a white whale — impossible to capture. That’s because to most physicians, investing in general seems like such a risky endeavor, best left to financial advisors or financial planners. That is how the financial industry makes a lot of its money.
However, once you begin your financial education and learn the simple investing strategies that will lead you to financial freedom, you start to realize that retirement information is not that complicated. That was my overwhelming response once I began my financial education.
But first, how much do you need to retire?
One of the top financial challenges I see others worry about is figuring out how much they need to retire. Luckily, with good financial information, this common goal can be pretty easily solved.
There are many different paths to retirement. But, one foundation of truth is that, in order to retire, your yearly income via investment withdrawals or passive income sources (like cash flowing real estate) needs to equal or exceed your yearly expenses.
You can accomplish this by increasing your investments or passive income streams or decreasing your expenses.
Ultimately, for doctors to figure out how much they need in their nest eggs, it’s necessary to estimate their expenses in retirement.
After this, subtract any actual or expected passive income you will have in your retirement. The remaining expenses need to be covered by withdrawing from your investments. And you can safely assume you can withdraw 4% of your nest egg each year for expenses from your financial vehicles.
If you don’t yet know your own retirement number, this 5 step calculator of mine can help you figure it out.
However, many doctors hesitate to retire even when they reach their goal number. Why?
Fear of Market Crashes!
The big fear in retirement is that the stock market or real estate market or other investment market will experience a huge crash.
The value of your investments will plummet and you won’t be able to cover your expenses. And there goes your retirement!
It’s a real fear. And you can understand why! Especially given the representation of the latest financial news in the mainstream media and on Wall Street.
So how can you crash proof retirement?
The good news is that there are plenty of steps that you can take to crash proof your retirement. And I’ll mainly focus here on crash proofing from stock market crashes because that is the most common and advocated way to invest for financial freedom. Real estate is another great option. But I won’t cover crashes in less safe alternatives that I don’t endorse like cryptocurrency.
Let’s start with the stock market…
Here are the top ways to crash proof your retirement from the stock market:
1. Invest in Index Funds
There are a ton of financial products out there. But index fund investing should be a core tenet of your investment strategy. When you invest broadly in low-cost index funds, you approximate the overall stock market. You are investing in the ingenuity of humankind and the global economy. Over the long term, this has been a safe bet.
Sure, a market correction occurs on average every 2 years and a bear market on average every 10 years. And we get nervous the first time we experience this. But overall, passive investing outperforms actively managed mutual funds 80% of the time.
And, when you invest in individual stocks, actively managed funds, or other high-risk securities, these can surely drop to near or actual $0 value. That’s bad news.
But it’s highly unlikely that the overall stock market will drop to $0 value. Even in the worst of crashes. I mean, if that happens, you’re talking about the economic collapse of society and humankind.
So, investing wisely in index funds is the first step to insulating from a stock market crash.
2. Adjust Your Asset Allocation Based on Risk Tolerance
This is a big one. Especially at the forefront of retirement.
In the beginning of our investment careers, we are looking for growth and increased return. And we are willing to take on more risk to achieve this higher return.
Because we are investing for the long term and know that corrections and bear markets will happen. And we are OK waiting these out for the inevitable overall market gains to come.
But, in retirement, our goal is preservation of our investments, not growth. We already reached our goal nest egg number. We need to keep it safe, not grow it more.
So, as we near and reach retirement, we need to adjust our asset allocation – the percentage of stocks and bonds in our portfolio. We increase our proportion of bonds, which are less volatile but with less return, and decrease our percentage of more volatile but higher return stocks.
Then, when a stock market crash happens, we safely have most of our portfolio in boring, old, safe bonds.
3. Use Safe Withdrawal Rates
I mentioned above that a good rule of thumb is assuming a 4% withdrawal rate for your retirement nest egg.
Studies have shown that this withdrawal rate provides a safe certainty of your nest egg lasting at least as long as you do throughout your retirement.
But, like all rules of thumb, it is not perfect.
So, in retirement, adjust your withdrawal based on the markets whether you are withdrawing from retirement accounts or taxable accounts. In good years, maybe withdraw 5%. If the next year is bad, withdraw less – maybe 3%.
This is a big part of a crash proof retirement.
4. Keep Your Expenses Nimble
In all phases of life, we can have anything we want – but not everything. Retirement is no different.
Build a margin of error in your expenses. Keep debt low. Be able to decrease your expenses in years of market losses, and you need to lower your withdrawal rate temporarily.
A crash proof retirement is achievable when your retirement finances are in order. With the right investing, saving, and withdrawal strategies, you can enter retirement confident that you will survive any fluctuations in the stock market.
Talk about peace of mind! Remember, your financial health is a big part of your overall health, even in retirement.
Now you can focus on what is really important to you and all of your retirement dreams!
I come at this with a lot of transparency. You can see exactly what my written financial plan is and how I work to crash proof it.
Disclaimer: The author is not an attorney, accountant, or financial advisor. His expertise is in the field of medicine. Any information in this op-ed and its links should not be considered personalized financial advice.
Jordan Frey, MD, is a plastic surgeon at Erie County Medical Center in Buffalo, New York, and founder of The Prudent Plastic Surgeon.