A big drop in the value of a retirement portfolio is enough to give any investor pause.
But when you are living off your investments in retirement or nearing that point, it may feel like the stakes are higher than they were when you had years or decades before you would start to use your money. If you’re retired, you need a plan for how to deal with sudden drops in the value of your investments.
A strong retirement income plan should be based on conservative market assumptions and, where appropriate, a withdrawal rate that has been stress tested and shown to work in the vast majority of likely market scenarios. This type of plan can help you weather a volatile market. If you have a plan like this, you’ve already got a leg up –you may not need to make any adjustments to your portfolio.
If you do feel the need to adjust your income plan while the markets recover, however, here are five tips to guide your approach.
Consider an income strategy that includes enough guaranteed money—including Social Security and your UCRP pension benefit—to cover housing, food, and other essential expenses. That way, you are either saving your investments or using them to fund entertainment, travel, gifts, and other discretionary expenses. And that gives you the flexibility to pare back the spending from your investment accounts during down markets. For details, read Get Smart About Retirement.
When the market is down, cash can be a valuable shock absorber. You may want to consider using the cash portion of your investment mix to delay the need to sell stock funds while the market is down. Selling stock funds in a downturn leaves you with less stock invested when a recovery comes, turning what may be a temporary market decline into a permanent dent in your income stream. Having cash on hand may give you enough time to participate in a recovery.
After cash, you may want to consider which parts of your investment mix to sell first. Consider the tax impact of different accounts. In general, it’s better to withdraw from taxable accounts first to allow investments in tax-deferred accounts like your UC 403(b), 457(b), and DC Plan accounts to potentially continue growing.
If you are spending down assets during a stock market swoon, check your asset allocation. If your mix has swung toward bond funds as stock prices have fallen, consider selling the bond funds first. That will leave the stock funds in place and give them time to recover.
When you create a withdrawal strategy, you have to navigate a complex interplay between accounts and investments—and changing market conditions add yet another layer of factors. If the recent ups and downs in the market have you losing sleep, it might be worth reconsidering your approach. A Fidelity Retirement Planner can help you review and adjust your retirement income plan.
You may also want to consider adjusting your withdrawal rate. As a general rule of thumb, limiting the amount you take from your investment account each year to 4%-5% of the account balance when you enter retirement, plus inflation, should shield you from running out of money prematurely. Some retirees may want to be extra cautious in a bad market and skip the inflation adjustment or reduce their withdrawal the following year. But again, most withdrawal plans should be built to last through typical downturns, so changes may not be necessary.
Market volatility is part and parcel of investing, so when you build a retirement plan, be sure to count on the fact that your balance will be moving in both directions. To help you keep your mind at ease even in the rockiest of markets, have a plan to help preserve the potential for your portfolio to recover with the markets, take care of your essential expenses, and make sure your savings will last.
Keep in mind that investing involves risk. The value of your investment will fluctuate over time, and you may gain or lose money.
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