Any time the stock market dips, we hear this refrain: "Stay the course. Only fools sell when prices are low." Or this one: "Since you're saving and investing for your future, market declines are opportunities to buy at low prices."
It's not bad advice, especially when you're still working with a steady paycheck and saving for your retirement. But what if you're close to retirement, or even already there, and you need your investments to pay for retirement expenses? Is the same "buy and hold" strategy still the best advice?
Retiring during market volatility
When retired people take money out of their investments in a volatile market, it's kind of like taking a road trip through the desert with a leaking gas tank. The gas is your resource for retirement expenses, and the fuel usage is the negative market effects on your portfolio.
The bottom line: You could be stranded much earlier than expected.
How to protect yourself in a market downturn
The first thing you should do is create a retirement income plan so you're financially ready for any market conditions.
Although a general rule of thumb is to have roughly 10 to 12 times your final salary saved up before you start your retirement, it's even better to have a plan tailored to your individual goals, needs and capabilities.
A good plan should model different market scenarios. For example, what would it look like if you retired during a bear market when prices are falling? What about if you retired during a volatile market when prices are all over the place? You'll also want your plan to account for possibilities like outliving your savings, the early death of a partner, or unexpected health care costs.
Life is always going to throw us curveballs, no matter what stage we're in. If you have a well-thought-out plan, you have a compass to help navigate this uncertainty.
If you're already living in retirement or nearing retirement, now's a good time to reassess your plan to ensure the right solutions are in place. This may sound like a no-brainer, but double, triple, and quadruple check your retirement readiness before you abandon the safety net of a regular paycheck.
6 strategies to reduce your dependency on markets during retirement
If you're unsure of your retirement readiness, consider using one or more of these strategies in combination.
- Enter retirement as debt-free as possible. Not all debt is equal, so eliminating high-interest consumer debt and keeping it paid off can help you avoid dipping into your investments during a bad market.
- Keep an adequate, easily accessible emergency fund for unexpected expenses. Just as an emergency fund protects you from depending on high-interest credit card debt, it also serves as a cushion for poor market performance during your retirement years.
- Resize your retirement budget by eliminating nonessential expenses. Look to reduce things you can live without or don't use as much. How often do you actually use your RV? Would you be better served by renting one on occasion? Or maybe you don't need an expensive golf club membership, and on the occasions that you do play, you could take advantage of a municipal course. Put everything on the table, compare alternatives and keep a budget.
- Consider downsizing or relocating. You can make your retirement savings go a lot further depending on where and how you decide to live. Consider the cost of living factors for various states Opens in a New Window. See note 1 Keep in mind that a big house usually comes with bigger taxes, utilities and upkeep. Relocating can be hard, but it can also be reinvigorating.
- Reduce financial gifting. Instead of sending a check, consider donating your time, experience and skills as a volunteer. Not only will you make a difference in your community, you'll benefit emotionally and physically, as well.
- Reduce support to family members and legacy goals. Helping family and friends financially may be a noble cause, but don't do it at the expense of your retirement security. Outliving your resources is a real risk. Even if you think you have the cash available, seek professional advice before finalizing a decision.
4 income-generating strategies
- Keep working if you can or look for part-time work during retirement. Ask yourself why you want to quit. Is it because of the common belief that "everyone retires at 65?" There are no simple answers here because every situation is different. What's important is that you need income, and working can be a great way to postpone dipping into your retirement savings.
- Look at tapping into nontraditional assets like home equity or a reverse mortgage. For people 62 and older with equity in their homes, generating income through home equity loans or reverse mortgages is a possibility, especially during market volatility. However, it's wise to tread cautiously with any kind of significant debt in retirement.
- Dedicate some assets to more secure solutions that you can stagger over time. They'll mature when you need the income, such as inflation-protected bonds, CDs or deferred fixed annuities.
- Consider an income annuity to provide a retirement paycheck. A powerful financial management tool to help generate retirement income See note 2 is an income annuity. Income annuities aren't correlated to the stock market, and you can't outlive them. Like Social Security and pension income, most income annuities don't provide much inflation protection if you use them as one tool in your toolbox. But they can help secure guaranteed See note 3 income.
Make strategic Social Security decisions
One of the most common retirement mistakes people make is taking their Social Security benefits too soon. In fact, nearly half of Americans take Social Security before their full retirement age.
Once you start, it's irrevocable, and you can leave hundreds of thousands of dollars on the table. For each year you delay benefits past age 62, you gain a 6% to 8% increase in lifetime annual benefits. That adds up quickly.
Because Social Security often serves as a primary source of guaranteed retirement income, choosing when to claim can be critical to retirement success. Single individuals or couples with long life expectancies may consider delaying the date on which they claim their lifetime benefits. On the other hand, singles or couples with short life expectancies may consider claiming benefits earlier.
Couples with large differences in their career earnings record may want to consider a strategy in which one claims on the other spouse's benefit. Take advantage of online tools that can help you maximize your Social Security benefits.
Talk to a financial advisor to create a retirement income plan
If you don't have a good financial plan, get one. Seek out a trusted, experienced advisor who can provide another set of eyes and ears.
If you already have a plan, run it again to include scenarios that reflect your worst financial fears. Then accept that bad things can happen, and you can only control so much.
One of the best things about having a retirement income plan is that when the road gets rough, you don't have to make big, emotionally charged decisions. If necessary, you can pivot in small, thoughtful measures — all according to your plan.
Protect your income in retirement.
Start planning now to help protect the retirement you’ve worked so hard for.