Nobody likes to see their retirement savings dwindle during a pullback in the market. However, for those on the cusp of retirement or just settling in, downturns in the market can pose an extra threat to their overall financial security.
Research has shown that particular care needs to be taken during bear markets for people who are in the first few years of taking income draws from their retirement accounts. Should the investment base decline substantially at the beginning of retirement, it will necessarily diminish future draws from the account or present the retiree with an unacceptably high draw rate.
With the stock market touching bear market territory, now may be a good time to revisit your retirement spending strategy.
Cut back on discretionary spending.
As inflation rears its ugly head, airplane tickets, hotels and overall travel costs have increased over the past year. For those who had a major trip planned in 2022, it may make sense to find a trip that is less expensive. To reduce your spending, also consider cutting back on dining out and consider deferring luxury or non-essential purchases. Being prudent in your spending during protracted market declines can help your portfolio in the long run.
Review your expenses so you know exactly how much you need to spend on essentials.
Manage your portfolio withdrawal rate.
Your portfolio withdrawal rate is the percentage taken from your account over the course of a year. Downswings in the market would cause your withdrawal rate to increase, since you are drawing on a smaller base. For those who rely primarily on their portfolio for income, alternative sources of income can serve as an alternative to reducing your draw rate.
Keep a cash buffer.
Rather than drawing down on depleted assets, keep one year of expenses in cash. This will allow the assets in your portfolio time to recover. If unexpected expenses arise, this will give you peace of mind knowing you don’t have to sell securities in a down market to come up with cash.
Consult with your financial planner.
Working with a financial professional helps manage the behavioral risk of the “do it yourself” approach. Your portfolio should be built to serve your financial plan. Your asset allocation should align with your risk tolerance, as well as risk capacity to allow for you to comfortably complete your retirement goals.
Fluctuating markets are a fact of life. It’s important to regularly monitor your financial plan to assure a successful retirement.