As a seasoned financial advisor, I’ve seen it all: the triumphs, the trials, and most importantly, the worries that keep retirees awake at night. High on that list is the fear of running out of money, compounded by the uncertainty of retiring in a down market. It’s the financial equivalent of setting sail in stormy weather – who wouldn’t be a little apprehensive?
Retiring in a down market can be tricky, but it’s not impossible. It requires careful planning, a well-crafted strategy, and a willingness to stay the course. But here’s the good news: with the right approach to cash management, a sound investment strategy, and a solid income distribution plan, you can work to ensure your retirement years are as golden as they should be. Let’s explore how.
Keep Cash on Hand, but Not Too Much
The greatest threat to your retirement account balance is selling shares when the stock market is falling. The reason: You will need to sell more shares in a down market than in a healthy one to come up with the cash you need. And the more shares you sell today, the fewer shares you will have left to take advantage of the eventual market rebound. When you sell in a down market, you compound your losses, and it is hard to recover from that.
This is why we recommend keeping at least one month of core expenses in a checking account, 3 months of core expenses in a high interest savings account that is easily transferable to your checking account, and at least 12 months of core living expenses in a highly liquid investment account so that you can “be your own bank” rather than selling investments at a loss in the beginning of your retirement period.
Your goal is to avoid taking money out of the market at a loss. This is especially true if a lengthy period of losses on Wall Street occurs in the first year or two of retirement when you risk having your portfolio prematurely depleted with a long life span still ahead of you.
However, you don’t want to move all your investments to cash. Having too much cash exposes the value of the dollar to the erosive power of inflation, while not keeping enough puts the portfolio value at the risk of market volatility. There is a delicate balance that must be achieved.
Speak with Your Advisor About Your Investment Strategy
Market fluctuations are inevitable, with the potential to rise or fall at any given time. The secret, however, lies in giving the more volatile elements of your portfolio the room to either grow or bounce back from a slump. Recognizing sources and strategies to maintain and replenish income, even amidst a market downturn, can prevent excessive spending and depletion of your resources.
Regrettably, it’s not uncommon for investors to surrender to fear during market lows, or conversely, be swept up in the euphoria of market highs. Faced with ominous market conditions, investors often resort to selling their investments prematurely at bargain-basement prices. On the other hand, when the market is booming, investors are often tempted to invest recklessly. Both scenarios can have detrimental effects on your portfolio’s returns and its potential for recovery.
One of the most crucial roles of an advisor is to guide clients in maintaining their long-term investment strategy, especially when the urge to buy or sell at inopportune times arises. This is why clients who don’t work with a financial advisor typically underperform in the market. Numerous studies support this assertion. One such study, titled “Help in Defined Contribution Plans: 2006 through 2012,” conducted by Financial Engines and Aon Hewitt, disclosed that 401(k) participants who received professional investment advice earned higher median annual returns compared to those who didn’t. After assessing the investment behavior of 723,000 employees across 14 U.S. companies, the researchers discovered that employees who used professional assistance experienced median annual returns that were 3.32% higher (net of fees) than those managing their own portfolios.
Income Distribution from Multiple Accounts
Retirees will likely generate their income from multiple different accounts. So in a down market, it will be best to pull income from sources where additional growth is not jeopardized. For example, a younger retiree may wish to claim social security benefits early as opposed to taking distributions from their IRA. Or, a couple may choose to rely on a partner’s earnings more heavily during a down market cycle to avoid withdrawing at a low.
Of course, various factors will shape a withdrawal timeline, including the tax consequences of withdrawals, required minimum distributions, and the additional resources at hand, such as Social Security, a partner’s earnings, or other forms of investment income.
The retiree’s distribution approach will influence how much income the portfolio needs to yield and the type of returns that are required to maintain the retiree’s financial reserves—ultimately providing for the longevity of the nest egg over time. The best way to take distributions is the way in which retirees can minimize the need for withdrawals to supplement their income. This multi-account planning can also help manage and lower taxes, potentially providing the portfolio with a recovery window.
Next Steps
While retiring in a down market might seem daunting, it’s not a death sentence for your retirement dreams. With careful planning, a cool head, and the right strategies, you can retire comfortably, no matter what the market does.
Are you getting ready to retire but fear the down market will derail your well-laid plans? Or would you like a second opinion from Uncommon Cents Investing on your retirement plan?
At Uncommon Cents Investing, we’re proud to provide our community with high-quality investing strategies and retirement planning assistance. And because we understand the unique challenges and opportunities facing high-income earners, we’ll be honest with you if you’re doing something that will derail you from achieving your goals! Contact us today for an introductory call!
