‘What are the possibilities? I retire and the stock market crashes. All my plans are upside down. I want to use my 401(k) to renovate my new home. What are my options?

Dear Quentin,

I am due to retire in two months and have already moved into my new home in the sun. I have not sold my apartment in a major US metropolitan area on the East Coast as I wanted to see how I would adjust to my new life. It’s a quiet but beautiful city on the west coast, and I wanted to see how I adjusted to both the year-round sun and the slower pace of life. It’s been a long road, but I’ve finally arrived here. I can finally relax. Or so I thought.

But that’s not my problem.

The stock market is my problem. My 401(k) is my problem. What are the possibilities? I retire and the stock market crashes. All my plans are upside down. What do I do now with my 401(k)? My original plan, as recently as last month, was to withdraw my 401(Ik) and use roughly $200,000 to renovate my house. I want to reorganize my kitchen, create a kitchen island that has a gas stove and enough space to prepare food. The architect is drawing up plans.

We’re moving walls, not mountains, but I’m really looking forward to getting started. Do I borrow the money instead? What do I tell them?

recent retiree

Dear Recent,

Congratulations on retiring, first of all. It is not a small achievement in any market. You’ve clearly played the long game, saved, invested, bought two properties, and more than that, you have options. Options are a wonderful thing: they are a second cousin twice incarcerated. You are free to do something or nothing. Sometimes choosing to do nothing is an action in itself, and that is what I advise you to do now.

You don’t want to use your 401(k) in a market like this. Don’t sell stocks in a falling market if you can help it and if you can afford to wait. And even though he just retired, he appears to be on a stable financial footing, so he can carry on as if nothing ever happened on Wall Street. Live in your house before deciding to make major changes. An architect will reflect his wishes, his dear wishes, and then some.

You have already made many changes. I can see how excited and impatient you are to start the renovation, but the hiatus may be a blessing in disguise. You may feel that by the time the market picks up, and eventually it will, you don’t need to move walls or change kitchens and bathrooms. Sometimes a pair of sliding glass doors in the kitchen can work wonders and bring the garden and all that extra light into your home.

“Options are a wonderful thing, they are a second cousin twice incarcerated.”

About the other elephant in the kitchen: the stock market. Don’t take out a big loan in retirement for a renovation. I would say even if interest rates weren’t going up. Stick to the 4% rule: Withdraw no more than 4% of your retirement assets, adjusting each year thereafter for inflation. This is a long-term strategy for retirees to avoid spending all of their retirement savings before hitting that big kitchen island in the sky.

In fact, recent research from Morningstar suggests that you should withdraw even less than 4%. They recommend that you withdraw 3.3% if you want to safeguard your retirement savings and make sure they last you the rest of your life. This 3.3% figure assumes a balanced portfolio and fixed withdrawals over 30 years, an estimated length of retirement years, which equates to a 90% chance of not consuming all of your retirement savings.

Unlike a recession (two consecutive quarters of negative GDP growth), a market “crash” does not have a definition that is agreed upon by all economists. It usually refers to a sudden and severe drop in stocks. Some analysts say it refers to a double-digit drop in a short period of time. But Jay Hatfield, chief investment officer at Infrastructure Capital Management, recently told MarketWatch that’s a 50% decline in a short period of time or over the course of a year.

There is no sugar to cover this. Not a good time to hand over your office keys and finally put away your stapler. The Dow Jones Industrial Average DJIA,
+1.27%
is down 13% since January and the S&P 500 SPX,
+2.39%
is down 18% and the Nasdaq COMP,
+3.82%
is 28% lower in the same period. By age 60, advisers generally recommend that you should have been 50% stocks and 50% fixed income, and reduce your stock allocation by 5% a year with 25-30% equities by the time you retire.

Good job renting out your city’s pied-à-terre and getting a taste of your new life. That gives me confidence that you are in better shape than your kitchen.

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