What caught my eye this week.

They say you should never let a crisis go to waste. But in his Spring Statement Chancellor Rishi Sunak blew it with two crises at once.

Cutting fuel duty was a small, pointlessly populist move. Both the cost and consequences are pretty modest in the grand scheme of things.

But the message it sends is dire.

The cost of a cut

The AA reckons only half the fuel duty cut will be passed on to motorists. What’s left won’t make much difference to many households.

Maybe £100 a year saved on average for a one-car family.

The people and businesses who burn a lot of fuel driving will of course save more. But they are exactly the ones that the tax system should be nudging towards alternatives.

You might say the cost of living crisis is an emergency. Well let’s remember that only six months ago the UN dubbed the latest nightmare IPCC report on climate change ‘Code Red for Humanity’.

The scientific consensus is that burning fossil fuels is heating the planet. And while there’s more debate about the size and scale of the consequences, the precautionary principle should have us acting to reduce this warming at every turn.

The surging price of gas and oil is a perfect casus belli to put Britain on the kind of war footing required to remake us into a low-carbon economy.

That is ultimately what will best preserve our standard of living and prosperity.

Instead Sunak subsidises more fossil fuel burning to cheers from MPs.

Paying for Putin

I know a few Barry Blimps out there imagine themselves to be bold contrarians by refuting climate science.

Well whatever – because today even they have a glaring reason not to be encouraging the burning of more fossil fuels.

Obviously I’m talking about Russian’s war with Ukraine.

At the same time as taking unprecedented economic action against Putin’s kleptocracy, Europe is paying up to $1 billion a day for Russian fossil fuels.

This money props up the regime and the war. We’re not so much talking good cop / bad cop as a bad cop / whisk the prisoner away for a luxury weekend in Dubai cop.

This reliance should have been dialed back years ago. The second best time is now.

Unlike Europe, Britain gets little of its oil or gas directly from Russia. But it’s not nothing – about 3-5% of gas and 6-8% of crude oil. So our hands are not clean. Some of your pounds at the pump go to Putin.

Still, it’s little enough that we could credibly attempt to slash what we spend on Russian fossil fuels to zero, fast.

Take back control

Lopping even the maximum 5p fuel duty cut off a litre of petrol costing £1.65 represents about a 3% saving.

Would it have been so onerous to ask motorists to skip one trip out of 30, or to pursue some other fuel saving measure instead? I don’t think so.

Yes, the sums are relatively trivial. What matters more is the signal.

If we’re to tackle climate change without putting on the hair shirts some argue it’s already too late for, every decision must be the right one. A public gullible enough to vote for Brexit cannot be told this transition will be cost-less and painless. They will bridle at every new initiative.

Professional wrong-man Nigel Farage is already waiting in the wings with his next self-destructive campaign – a referendum to abandon our climate goals.

Farage might dream of the waters of the Straits of Dover rising. But anyone with kids – or a passing interest in the future of humanity – shouldn’t tolerate his bullshit twice.

I happen to agree that in the long-term – as Boris Johnson said recently – “green electricity isn’t just better for the environment, it’s better for your bank balance.”

But in the medium-term it will be a costly and disruptive transition. We need to take this seriously. The public must know there’s work to do and a bill to pay. As many as possible must buy into it.

To quote the UN Secretary-General again, the knee-jerk rush for alternative fossil fuels in response to the Russia-Ukraine war is “madness” that will derail our already-insufficient climate goals.

It’s no surprise to see a man with Johnson’s moral compass dash off to to Saudi Arabia to seek to replace one murderous autocrat with another.

But as a nation we must do better.

Where’s my tax cut?

Around this point somebody is typing a comment saying that living in my ivory tower – um, in a two-bed flat in a London suburb – I don’t get the pressure the average person faces due to inflation.

Never mind that I read and link every weekend to various articles about exactly these pressures.

I’ll just conclude by pointing out that the fuel duty cut isn’t even fair by that measure.

Many people don’t drive. So they won’t benefit directly from a fuel duty cut. But they’ll pay for it via taxes.

Many people can cut back on non-essential driving. They can’t cut back on, I don’t know, food. Yet they’ll pay for the fuel duty cut for motorists.

The fuel duty cut is a specific tax break for an activity that threatens our financial future due to climate change – and maybe even our corporal one given the worst-case scenario from Russia.

Fuel rationing via a national speed limit or driving curfews or surcharges would have been fairer.

Alternatively, the money spent on cutting fuel duty could have gone instead on free public transport.

Then again much of the country is less well-served than London by public transport – another problem to fix, not a reason to support fossil fuel subsidies – so perhaps Sunak could have just sent everyone a cheque for their share of the £2.4bn cost of his fuel duty cut?

That way we could each ease the pressure on our finances however we saw fit.

Have a great weekend.

[continue reading…]

This is part four in a series on how to plan and pay for the cost of social care in later life.

Part one covered the gulf between genuine care needs and State provision. 

Next part two untangled how the means test values your assets (including pension and property) and when it excludes them. 

Part three explained when you qualify for State funding and when you don’t.

Now we’ll help you estimate an average care home cost that can be used to stress-test your retirement plans.

When I retired, I didn’t know if my financial plan could withstand years of one of us living in a care home. I just crossed my fingers and hoped that we’d never need to find out.

Or perhaps we could sell our house if there was no other way?

In retrospect, that was no plan at all. And now I’ve dug into it, I’ve found the data does exist to formulate a plausible lifetime cost for social care. 

In this post, I’ll show you how to construct your own number. You can then model how your own retirement finances stack up against the hard realities of the UK social care system. 

I’ll focus on the cost of funding a care home because that’s the nightmare scenario that can suck your own home into the means-testing mix. 

But I’ll present care in the home data at the end, too.

Caveat corner – Any number we come up with will necessarily be a crude average. Obviously the future cost of social care for any individual is unknowable. But as ever, it’s better to be roughly right than precisely wrong. The number we can conjure is informed by the best data available, and the exercise itself sheds valuable light on some of the challenges you may face. Demystifying the social care financial threat has reduced my fear of this unknown, and left me better equipped to negotiate it, should it affect me or my loved ones. Note we’ll root our numbers in today’s prices. Even if the spectre of social care lies decades in your future, your assumptions must rest on how your financial plan deals with the system as it exists today.

How to calculate care home costs

Here’s the process:

• Take the average annual cost of a UK care home place
• Multiply by life expectancy once in a care home
• Up-weight by care home fee inflation 
• Customise by gender, age, type of care (nursing and dementia care both increase cost), and geographic area to account for the postcode lottery
  

The average annual care home cost is:

£34,944

That number comes courtesy of Which and Paying For Care.1 Their source is LaingBuisson’s Care Homes For Older People UK Market Report. 

The report is an annual snapshot of the care homes market produced by business intelligence firm LaingBuisson. The data is widely used in the social care sector, including by the UK Government. 

Note that £34,944 is far from a worst-case scenario. 

The ‘average’ worst-case scenario is dementia care in a south-west of England nursing home: £58,864.

That’s £4,000 more expensive than the same care in a south-east of England nursing home. 

The best case is the £28,392 cost of a care home in Northern Ireland – no nursing care or dementia care included.

Paying For Care enables you to customise costs by region and care type.  

Terminology tee-up – Care homes typically offer personal care. That’s a defined and regulated service that supports people with tasks such as washing, dressing, and going to the toilet. Nursing homes are registered to provide care that requires a nurse. Dementia care is another service again. In reality, this distinction by provision is not clear-cut. A single care home may provide all these services.

Add the self-funder premium

The care home industry’s worst-kept secret is that those paying from their own pocket (self-funders) are charged more for the same care, in the same homes, as state-funded residents.

That’s because local authorities – grappling with squeezed budgets – use their buying power to pay the care homes less than the market rate. 

The squeezed care homes then make up the shortfall by squeezing self-funders.  

Yes, it’s another hidden tax2 that props up social care so long as our politicians fail to fix the system. 

Back to the data. 

The £34,944 average annual care home cost combines state-funded and self-funded places. 

So we must add a self-funder premium – because few of us will qualify for local authority support until our assets have been rundown. 

How much is the self-funder premium? 

The premium is north of 40% according to the House Of Commons briefing paper: Social care: care home market – structure, issues, and cross-subsidisation.

The paper quotes an average premium of 43% from a LaingBuisson white paper and 41% as reported by The Competition and Markets Authority. 

I don’t know how exactly LaingBuisson’s £34,944 splits between state and self-funded residents. So we’ll assume fifty-fifty. 

The actual proportion of the self-funded care home population (in England) lies somewhere between 40% to 52%, depending on the source you look at.  

Multiplying the 40% self-funder premium by our 50% self-funded population assumption means LaingBuisson’s £34,944 care home cost should be about 20% higher than the State-funded figure. 

So we increase £34,944 by 16.67% to find our self-funded care home cost. 

£34,944 x 1.167 = £40,780, which is the self-funded average annual cost of a UK care home.

That’s 40% higher than the average state-funded UK care home cost of £29,117. 

If you choose a different figure from Paying For Care’s table then multiply by 1.167 to add the self-funder premium. 

Life expectancy in a care home

Now we multiply our £40,780 figure by the number of years we can expect to live in a care home. 

Life expectancy data comes from the Office of National Statistics (ONS) report Life expectancy in care homes, England and Wales: 2011 to 2012.3

Life expectancy for care home residents aged between 85 and 89 is:

• Four years for women
• Three years for men

I’ve chosen the 85 to 89 cohort because your chances of going into a care home are relatively low before you reach that age. (That’s according to the ONS report Changes in the Older Resident Care Home Population between 2001 and 2011.)

The table below details the proportion of the total population living in care homes (England and Wales) calculated by the ONS:

If you’re a man feeling a bit smug about the differential from age 85, don’t think it’s because you’re a tough guy. 

It’s most likely because a female carer has traditionally kept your sort out of care homes. Females don’t enjoy the same T.L.C., because men typically don’t last as long.  

(Or because men are too selfish – I see you at the back!)

Actually, female numbers in care homes declined 2001-2011, despite an aging population. The ONS thinks it’s because men are pulling their weight more as carers as the female/male life expectancy gap closes. 

There’s also some evidence that better health in later life – plus an increasing preference for care at home – could offset the rise in frailty that accompanies extended lifespans. 

Therefore, if you decide to tweak the life expectancy figures because you’re youthful – and so will likely live longer than previous generations – it’s reasonable to add a lower uplift than implied by your birthday. 

Care home cost inflation 

The £40,780 care home cost must also be multiplied by inflation for every year of life expectancy in care beyond the first. 

More realistically, we should multiply by an annual rate of care home price rises – which I’ll estimate at around 5%. 

My care home price inflation figure is partially derived from healthcare charity The King’s Fund. It estimated that the cost of care home places rose by 12% above inflation from 2015-16 to 2019-20.

That works out as approximately a 3% annual rate above inflation. Adding that figure to average UK consumer price inflation (CPI) of 2.5% gets us to 5.5%. 

But I round down to 5% annually in the hope that the political pressure to improve social care takes the steam out of costs eventually. Moreover, Monevator writer and finance industry insider, The Planalyst, tells me that care home inflation is around 5% annually in her experience. 

Paying For Care assumes an annual fee increase of 3%. So use that if you’re more optimistic than me. 

The cost of a care home: putting it all together

Let’s tally the bill:

• The average care home cost is £34,944. 
• £34,944 x 1.167 self-funder premium = £40,780
• Men: multiply that number by your three year life expectancy in a care home. 
• Women: multiply that number by your four year life expectancy in a care home. 
• Multiply every year after the first by an additional 1.05 to factor in 5% care home cost inflation. 

By my sums:

The total average care home cost for a man is £128,558. 

The total average care home cost for a woman is £175,765.

That might not seem so bad, but…

It could be worse

…depressingly, I’ve uncovered reasons to think I’ve under-cooked these numbers. 

Care homes often charge extra for services such as wi-fi, outings, transport, and carer support to attend dentist, GP, or hospital appointments. 

Please read this excellent report by Citizens Advice on hidden care home charges if you ever need to choose residential care.

The new social care cap won’t ride to the rescue

If you’re living in England, you might hope the lifetime cap of £86,000 will cut your losses. 

But many of us won’t live long enough to hit the cap. 

That’s because swathes of your social care spending is officially excluded from your £86,000 total. 

A year one £40,780 care home cost looks like a huge dent in your £86,000 at first glance.

But you only move £18,717 towards the target after deductions. 

Most egregiously, it’s not the amount you paid for the care home place that counts. It’s the amount your local authority would have paid for that place. If it was paying for it! Which it’s not.

Calculating social care cap progress

To estimate the local authority rate, multiply £40,780 by 0.714 to give £29,117.

That’s the the state-funded price for your care home place. 

(Remember, we’re assuming the average self-funded care home cost is 40% higher than its state-funded equivalent.)

Deduct another £10,400 for Daily Living Costs (DLCs). The government has stated that you’ll be responsible for this amount per year – before and after hitting the cap. 

(We covered the ‘logic’ of that in part one of the series.)

£29,117 minus £10,400 = £18,717 progress made towards the social care cap in your first year in a care home. 

Now multiply that figure by your life expectancy and inflation (I assume the state rate and DLCs increase by 3% a year). 

The total is your contribution towards the £86,000 cap by the time your ongoing concern with this life is a coin flip:

Men’s social care contribution after three years is £57,888 – £28,000 short of the cap. 

Women’s social care contribution after four years is £78,353 – £8,000 short of the cap. 

If you do qualify for partial state funding along the way then that expenditure doesn’t count towards your cap either. 

Thus while state funding sounds like a win, it could crush your disposable income after you’ve paid your care home costs, because it delays the point at which the cap comes into play. 

I’ve modelled how a modest retirement income fares against the cold comfort of the social care funding system. Stay tuned for that in the next post in this series.

How to estimate care at home costs

You can estimate care at home costs using the UK Homecare Association’s minimum price for homecare. 

The Association has set the minimum rate for professional homecare at £23.20 per hour. (The rate based on the living wage is £24.08 per hour.)

Multiply the hourly rate by common amounts of daily care at home.

For example:

• Two hours per day: £24.08 x 2 x 7 x 52 = £17,530 annually
• Four hours per day: £35,000 annually
• Live-in care 24/7: £210,363 annually

Note care at home agencies often charge for extras such as unsociable hours and cancellations. (The Which website has a good piece on the hidden charges.)

I haven’t found life expectancy data that specifically covers people receiving care at home. 

You could adapt this ONS report on Disability-Free Life Expectancy in England. 

The crude headline is women can expect to live 18.5 years with a disability later in life, while men can expect 15 years. 

The report is nuanced however. And there’s no evidence that its definition of a disability is a good proxy for requiring care at home. 

Personally, I’d use a 3% to 5% inflation rate in the absence of specific care at home data on this point. 

Care home cost impact assessment

Pitting this cost model against my own retirement finances was eye-opening. The remorseless logic of social care funding forces you to sell off assets before you get any help. 

State intervention began within two years. But this still left me with little leftover money to top up the bare bones care package.

I’ll go into the gory details in the next post.  

And do remember the only certain thing about the costs I’ve presented is that they will be wrong. 

Your actual care home costs will depend on:

• The care home you choose
• The care you need – which can change over time
• How long you need care
• The actual rate of social care inflation
• The generosity of State provision at the time

But most of all, I hope the number will be wrong because you and yours never need social care. 

Take it steady,

The Accumulator

Bonus appendix: social care funding – the diagram

This flowchart graphically simplifies the complexities of the social care system. I hope it helps you follow this series.

1. Paying For Care is a consumer-facing website funded by Just Group plc. Just Group is a financial services company focused on retirement income products such as annuities and equity release. [↩]
2. As discussed in Parliament. Key quote from Baroness Browning: “I still find it bizarre that we have this subsidy in residential care… whereby self-funders subsidise those for whom the local authority purchases care. There is never any discussion around this. We do not talk about how fair it is. There is no discussion about the fact that individuals who find they have to self-fund are not paying just their weekly fees, but are also subsidising the person in the next room, or possibly even more than one person. I really think it is time that we exposed how the funding system for care works. It is like having a secret tax that nobody knows about. I find that quite abhorrent.” [↩]
3. This report is based on 2011 census data. It’ll be interesting to see how it changes when the 2021 census numbers are crunched. [↩]

Everyone assumes it won’t happen to them. But from history we know that not everybody is so lucky.

No, not jury service. I’m talking about sequence of returns risk. The unluckiest break that derails your financial future and throws cold water on your FIRE1.

Sequence of returns risk is the risk of earning negative portfolio returns shortly before or after you retire. It’s a dangerous situation created when you start withdrawing money from a portfolio that’s seen little to no growth, only shrinkage.

Consider the following graphics from Axa Equitable [PDF].

The first charts the fortunes of three investors over three different time periods. All start with a $1 million portfolio that grows for 25 years.

Each investor experiences a different market cycle. But – neatly for the example – all three enjoy the same 6% average annual return:

The maths means the route doesn’t change the destination. With no withdrawals and the same average annual return, everyone ends up at the same place.

But what about with withdrawals?

We assume the same investors start with $1 million each once again. They live through the same cycles as before. The average portfolio return is again 6%.

Déjà vu? Don’t worry, things are about to get interesting.

This time each investor withdraws $50,000 a year from their portfolio:

The difference is stark. The portfolio returns are the same. And Mr Green still leaves a fabulous $2.5m legacy.

But now Mr Blue goes bankrupt!

Regularly taking money out of the portfolios vastly changed the outcome.

Mr Blue’s first three years of withdrawals coincided with a crash. He never recovered.

However the same three bad years came at the end for Mr Green. It scythed his portfolio, but it had already grown substantially by then.

That is sequence of returns risk.

A different mindset

Not selling as an accumulator is fairly easy. All crashes are buying opportunities with a long enough time horizon. Why not grab a bargain?

However a de-accumulator must – by definition – be taking money from their portfolio.

And sequence of returns risk means that a few early bad years for the markets – combined with withdrawals – can torpedo your long-term prospects.

Sure, even after an early bear market a decent portfolio should eventually start growing again.

But for an unlucky few, the damage is done. You’ll be a failure case. In 20 years or so you’ll run out of money.

You’re already dead. You just don’t know it yet.

SWR versus sequence of returns

Let’s not be too gloomy. The initial sustainable withdrawal rate (SWR) research was aimed squarely at these issues. It estimated how much you could spend while being confident (if not certain) that your portfolio would outlast you.

The data that fed into the SWR research included some truly dire periods. Depressions and wars.

Yet choose a low enough withdrawal rate and the data shows that – historically – everyone made it.

Even those those who retired into a bloodbath for shares!

However most people – especially early retirees – can’t withdraw a very low 2% a year. Their portfolios are too small.

Luckily you can ratchet SWRs up a lot and still hit 95% forecast success rates.

So most people do that. We assume we’ll withdraw around 4%, say, and 19 cycles out of 20 we’ll be okay.

In the good times we forget that means 5% weren’t okay. They failed.2

The opposite is a fat streak. Your portfolio doubles, and doubles again. You spend with abandon. You leave your grandchildren a fortune. Those grandchildren tell everyone about their grandpa who retired at 50 and died rich. Someone writes an article about your investing smarts. Your portrait beams.

I hope that happens to us.

But this post is about avoiding joining the blighted failure cases – before it’s too late.

Retiring into a market that’s falling fast or an economy where high inflation threatens to savage your real returns?

Let’s consider your options.

Easy mode: watch but do nothing (yet)

Let’s say markets are down. A lot. But it’s not yet a long dream-crushing bear market.

Inflation may be stubbornly high. But it’s not yet an era of high inflation – let alone hyperinflation.

Should you act?

A good financial plan and asset allocation anticipates turbulence. Maybe you can grip the armrests tighter rather than parachuting at the first wobble.

Consider it a watching brief. Like when a suspect lump seems benign but your doctor says to keep an eye on it.

Most market upsets quickly pass and are soon forgotten. Look at Michael Batnick’s chart:

Click to enlarge the drama…

Source: The Irrelevant Investor

Not every investing herring turns out to be red – that’s the point of sequence of returns risk.

But depending on how you’d respond to a scare, it may be best to pause and ponder.

Pausing your plan

Reminder: if you’re in the saving and investing phase, keep at it. This post is not about putting everyday accumulation on hold. (Buy more shares in bear markets. You’ll end up richer.)

It’s only those drawing down their savings – or those getting close to the transition – who should consider acting if a bear market strikes, especially in the early years of retirement.

As we’ve just seen there are always worries in markets. Few threaten a solid retirement plan.

But some do. And it’s not obvious which ones in advance.

Consider 2020. It was a banner year for stock market returns. Spending fell so people saved more, too. Some people also got government assistance.

But we only know all that good stuff now. For much of the year people were frightened.

Who could fault somebody who retired in 2019 and panicked in March 2020?

Shares had cratered. A new illness was killing thousands. Governments were turning economies off. Many expected a global depression.

Personally I didn’t think it was the end of the world. But a threat to a new retiree’s long-term financial future? That was a far harder call.

So let’s be humble and pragmatic and consider some options.

Work one more year (or two)

Somebody has to say it. Maybe if a bear market is raging, keep working?

One more year is a curse in the FIRE community.

But truly bad periods for sequence of return risk are rare and damaging. Trying to avoid them is worth considering.

Stay employed longer due to a falling market and you won’t spend from a depleting portfolio. You could even add to it. Things should look better on the other side.

There are two snags.

Firstly, it may not be better on the other side. At least not anytime soon. Some bear markets last for years. What if you end up throwing several more years into the work furnace?

I’ve no idea how you’d feel. Some would-be retirees like their jobs. Some are killed by them.

But I know for sure you won’t get those years back.

Second snag: maybe it was a false alarm.

The good news is you’ll be richer when you do retire. But again you can’t get that time back.

Also you’re still exposed to sequence of return risk when you finally do retire. Albeit with more assets as a cushion after a year or two extra at work and some portfolio growth.

Go back to your old job

If you recently left work, you’ll never be more employable again.

Perhaps rewind the tape for a year or two if you’re having second thoughts.

Acquire more money

Sequence of returns risk hurts when you spend assets that have shrunk too far, too fast.

Continuing with employment avoids that. Instead of spending from the portfolio, you’ll save more.

But what if you can’t hack your job any longer?

Well there are other ways to get spending money.

Downsize your home

Many retirees plan to downsize someday. Where practical, bringing forward such plans can release cash to tide you through an early bad market.

If a stock market downturn coincides with a recession, downsize sooner rather than later if you’re going to do this.

Remember: you’re taking capital out of the property market. Not moving up the ladder. So do it when prices are buoyant to get the most cash.

Take a part-time job

Okay, so you can no longer stomach the nine to five to email before bed. But what about the ten to two? Or the Monday to Thursday?

A managed retreat from work keeps some money coming in for longer. Again, that could reduce or eliminate a fatal drawdown of your capital.

High-end information workers are blessed here. The word you’re looking for is ‘consultant’. Sweat that intellectual capital while you still have some!

Skilled tradespeople might transition to part-time pretty easily, too.

But middle-managers who owed their income to recently forfeited fiefdoms could struggle.

Enter the gig economy

The jury is out on the uber-flexible gig economy. Are today’s young workers getting a raw deal?

Maybe.

But for a workplace refugee in a bear market, the gig economy could be a lifeline.

Drive an Uber. Deliver for Deliveroo. Rent out a room on AirBnB. Whatever works for you.

It won’t be lucrative compared to your old salary. It probably doesn’t need to be.

I’ve explained before how just a little income is worth more than you think.

A few hours earning £100 a week equals £5,000-ish a year, ignoring taxes. You’d probably need over £100,000 in capital to generate the same income, depending on your SWR.

Spending your gig earnings to reduce your withdrawals could take the edge off a nasty sequence of returns.

Debt or other reserves

Now we get to what’s probably the least good option in the ‘mo money!’ category.

Best case: maybe you could hurry along an expected inheritance or some other bequest. There may even be taxes advantages.

Middling good/bad would be to drawdown cash from an offset mortgage. You’re taking on new debt, and increasing your monthly outgoings due to interest. Not ideal. (You’d also probably have to have arranged the offset mortgage years in advance while working. It may not be an option now.)

The benefit of releasing cash is your investment portfolio then requires less raiding for liquid spending money. Just remember to rebuild your offset mortgage pot ASAP when the markets bounce. (And acknowledge the risk that it might not bounce to your schedule.)

Beyond that are even worse options. Borrowing from family or friends. Raising cash on margin against your portfolio. (I wouldn’t, too risky). Equity release.

I’d cut my spending instead.

Tweak your investing strategy

Again, a market wobble isn’t unusual or necessarily an emergency. A good plan should be ready for rough patches.

Maybe you’ll spend a cash reserve first. Next you’ll sell your bonds. Equities last. They may even have bounced by the time you have to sell some.

Or perhaps you plan to live solely off portfolio income, and not sell your principal? Fine but this isn’t a free lunch. Inflation can outrun dividend growth for starters, and dividends can be cut. Though at least you’re not a forced seller of shares.

But however good your plan, as the German field marshal Moltke the Elder is often paraphrased: no plan survives contact with the enemy.

Or maybe you didn’t have a great plan anyway. With the market falling you see you were winging it. Or you were over-optimistic. Or maybe you’re less risk-tolerant than you thought.

Lower your sustainable withdrawal rate

What about a lower sustainable withdrawal rate? Success or failure can turn on small tweaks. Target 3.5% as your initial spend instead of 4% and you might never run out of money.

Consider a US investor spending $40,000 a year from a million dollar portfolio over 30 years. She would have have run out of money six times in 121 historical cycles, according to the FIRECalc tool:

However cut that withdrawal amount by just $3,000 to $37,000 and only one period saw a failure.

At $35,000 a year there were no failures.

Don’t get hung up on these specifics. This is historical data. The future is unknowable. The point is lowering your SWR by whatever you can manage will boost your chances.

Note that for long-term security you don’t just reduce your SWR during the early bearish years and then ramp it back up. The maths compounds from a lower spending base over a full retirement.

You were unlucky enough to retire into a market crash. So digest it and move on.

(Perhaps if the stock market gets truly euphoric you could reduce risk and readjust. But don’t rush!)

Take more risk

This is a bit counterintuitive and won’t work for most. But selling more of your safe assets to buy equities during a downturn should see you climb faster and higher on the other side.

Assuming you make it…

It won’t be easy. You’ll be taking stuffing out of your safety cushion to buy what’s reeking havoc. And you must have enough safe assets to spend your way through, so this is only an option for the wealthy. There are no guarantees it will work either – especially not quickly.

I could imagine doing this, but that’s after a lifetime of very active investing. Most should consider other options.

Take a bit less risk

You wanted a feature-rich retirement. You also wanted to leave a chunky legacy. The sun was shining and markets were flying.

So you exited the workforce with an aggressive portfolio – 80% in equities.

The first Monday out of work shares fell. By the end of the week they’re off 10%.

You panic.

There’s no shame in learning your true risk tolerance later than is ideal. It’s better than denial. Investing when you have a regular salary is very different to shepherding a pot of worldly wealth.

You are where you are.

Now, nobody wants to sell when markets are down. You’re locking in losses.

But it’s better to take limited action when shares are 10% off than to capitulate after a 50% decline.

If you’re rich enough, consider swapping shares for cash and bonds until you feel comfortable again. Do not abandon shares completely. Nearly all of us need some equities to meet our portfolio goals. But try to immunise yourself against freaking out at further falls.

(Then maybe turn off the stock market news.)

It might also be worth looking at an annuity. Especially if you’re a not-so-early retiree.

Annuities can provide a low but very safe floor to your income drawdown strategy. That’s valuable.

What not to do

Don’t punt on cryptocurrencies or buy NFTs to make good your losses. Don’t bet at the races.

I’m also not talking about tactically selling your shares, hoping to repurchase them when the falls are done and the sequence of returns turns to your advantage.

If you could be confident of making that operation work you’d already know it. You probably can’t.

More likely you’ll lock in losses and then miss the rebound. Maybe you’ll spend years waiting for a second bite. Your entire strategy is now derailed.

Market timing will cost most people more than they ever make. It’ll also turn your hair grey.

Cut your spending

Your wealth is down. Your portfolio is shrinking. But you need income from it to get by.

So spend less money and then you’ll need less of an income.

If you’re a fancy sort, you’re adopting a tactical withdrawal strategy, dontyaknow.

If you’re a simpler soul like moi, you’ll cancel your foreign holiday, put off buying a new laptop, and rediscover your inner graduate student.

Live well but cheaply until the tough times pass. It’s not so hard. (Especially if you own your home).

There are innumerable ways to reduce your outgoings. Doing so probably got you here.

Just remember retirement spending is a thorny problem not simply due to the risk of running out of money. There’s also the ‘danger’ of leaving lots of leftover money at the cemetery gates.

Because sequence of returns risk cannot ever be known perfectly, you may be making unnecessary sacrifices. Some postponed opportunities (travel, say) will eventually recede completely.

Many retirement plans assume your pot will go to nowt. If your plan does, get used to it.

The ideas in this article aim to reduce the risk of accelerating the march to zero due to an unlucky early knock. The aim is not to abandon your plan whenever your portfolio wobbles a few percent.

Down but not out

If you’re vulnerable to sequence of return risk when a bear market strikes – newly-retired, smaller portfolio, early exit from work, few other resources – I’d consider acting to protect your future.

By pick-and-mixing a few evasive measures, you could reduce your exposure to sequence of returns risk without too much pain, even if your portfolio has been shellacked.

For example you could reduce your long-term SWR by 0.25%, work a day a week, and swap one meal out a month in your budget for an M&S Meal Deal.

Perhaps that would make all the difference?

This is not an exact science. That’s why I haven’t bothered with spurious calculations in this article.

Nobody knows the future.

A bad market can turn on a dime. Perhaps you’d have been fine, after all.

Rather it’s all about risk reduction.

If today’s crash is tomorrow’s false alarm, no harm done. You’re better-placed going forward. You can enjoy swankier remaining years than you’d originally planned for.

Conversely if it’s not a false alarm, you’ll be glad you did something early.

Better safe than sorry.

1. Financial Independence Retire Early. [↩]
2. Don’t dwell on the exact details here. I’m just illustrating with round numbers for simplicity and because the future is unknowable anyway. [↩]