Retiring in a Volatile Market? Here's How to Protect Your Savings.
Key Points
The danger of retiring in a wild market is locking in portfolio losses early on.
Building a cash buffer reduces that risk.
Cutting spending can also be a huge help.
- The $23,760 Social Security bonus most retirees completely overlook ›
Stock market turbulence is never a fun thing to deal with. But if you're on the cusp of retirement, it can be especially disruptive and nerve-racking.
Once you stop working, you'll probably lean on your retirement savings for income. And if you start doing that at a time when the market is all over the place, you risk having to take losses in your portfolio early on that you may then never recover from.
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The good news, though, is that market volatility early on doesn't have to derail your retirement plans. With the right approach, you can safeguard your savings without having to postpone your workforce exit.
Build yourself a cash buffer
If you start tapping your individual retirement account (IRA) or 401(k) at a time when your investments are down, you'll risk locking in permanent losses. That's why it's important to build yourself a cash buffer.
Cash won't lose value in a volatile market like stocks can. So, if you arm yourself with enough cash to cover a couple of years of living expenses, you'll buy yourself the option to leave your portfolio untouched if its value drops. This can be an especially valuable thing early on in retirement, when locked-in losses can hurt the most.
Take a more flexible approach to spending
You may have a certain withdrawal plan going into retirement. But during a volatile market, it pays to be flexible.
It may be that your original plan was to withdraw $100,000 from your IRA in your first year of retirement and adjust future withdrawals for inflation. If your portfolio is up or even flat at the start of retirement, that plan may be feasible. But if it starts losing value due to market volatility, it's a good idea to adjust your withdrawals downward to preserve savings.
In this example, that could mean taking a look at the discretionary part of your budget and reducing spending there. And that could translate into withdrawing $90,000 in your first year of retirement instead of $100,000.
Will that mean that your first year of retirement may not look the way you expected it to? Unfortunately, yes. But reducing spending and withdrawals as a reaction to market volatility could be the thing that helps you avoid running out of money later in life.
Retiring into a volatile market is far from ideal. But it's also not a totally unusual thing. The key is to focus on building yourself a cash buffer and maintaining flexibility so an initial bout of turbulence doesn't mess up your plans in the long term.
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