Q&A: Market Downturns During Retirement

fixed income

Question: My wife and I are in our early 70s. We need just over $4,000 a month for living expenses, half of which comes from Social Security. The rest comes from our investments, so when the stock market drops, so do our account values. It gets very scary at times. How can we and people like us — who are expected to have greater longevity — protect ourselves during severe market downturns?

Ric: I’m glad you asked, because this is an important question. In fact, it’s more important for you than it is for your children, who (being in their 30s, 40s or 50s) have decades before they need to use the money they are dutifully saving in IRAs, brokerage accounts, retirement accounts at work and other vehicles.

When markets decline, your kids can shrug their shoulders because they know they’re not going to touch their savings for 10 to 30 more years. And they know that, by that time, the market will be higher than it is today. They might even view a temporary market downturn as a good buying opportunity.

But that’s not the case with you.

You have a different perspective — for three key reasons.

  1. You’re not adding to your investments because you’re not working. Therefore, a market decline isn’t a buying opportunity for you because you don’t have more money to invest.
  2. You’re withdrawing cash to support yourself. Generating monthly income from your accounts is a key service we provide for our clients who are retired. And making withdrawals while prices are declining is scary, because the lower the prices go, the more shares you must sell to obtain the same amount of money — leaving you with fewer shares. It’s a downward spiral that you are right to fear.
  3. You’re afraid that you don’t have 20 or 30 years for prices to recover. Your children can be carefree about this, but you can’t wait until you’re 90 for the market to improve.

So what can be done? Here’s the four-step strategy we recommend for our clients, and I would recommend the same for you:

1. Make sure you have adequate cash reserves. We typically suggest at least two years’ worth of expenses in reserve. You say you need just over $4,000 monthly, but half comes from Social Security, which is about as secure an income stream as there is. So I’d suggest you have $50,000 in reserves.

By maintaining this money, you can stop withdrawing from your investments when prices are down and tap your cash reserves instead. That’s what they’re for, and your reserves give you two years for the markets to recover. Historically, that’s plenty of time.

2. We would want to make sure you are not withdrawing money from your account too fast. We want to make sure your money will last your lifetime, which could be 30 years or more, so we’d recommend a maximum withdrawal rate for you.

3. We want to protect your portfolio’s ability to do two things: avoid large, sustained losses during market declines, and be able to recover timely when losses do occur. Proper diversification can help; to help it avoid large declines your portfolio shouldn’t have too much exposure to the stock market or other volatile asset classes.

4. Finally, we’d want to examine your personal circumstances over the long term. For example, how long will you stay in your current house? Might you want to move, and if so, when and to where? To an over-55 community, into assisted living or into your children’s home? Elsewhere? Tell us what you want to do, and we’ll help you figure out how to make it happen.

The above can help you weather periodic financial storms. We’d be happy to do this for you just like we do for our clients.

Originally published in Inside Personal Finance June 2016

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