How Much Should You Reduce Retirement Spending During a Market Downturn?

When you're in the process of saving for retirement, a stock market downturn can be aggravating. When you're actually retired and are living off of your IRA or 401(k), a stock market downturn can be downright scary.

At that point, you risk locking in significant portfolio losses if you continue tapping your savings for money when the value of your investments is down. So it's important to be flexible in these situations, which means being prepared to reduce your spending.

Just how much should you reduce? The goal is to cut a reasonable amount while also making sure your basic needs aren't being neglected.

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Limit cuts to discretionary spending first

When the market first tumbles, it's natural to panic. But one thing to remember is that not all market downturns are years-long events.

As such, you shouldn't necessarily rush to give up your car or start limiting yourself to discount grocers only. A better idea is to review your discretionary spending and make cuts in categories like dining out, entertainment, and travel.

But even those cuts need to be reasonable. If you have strong savings, a market downturn doesn't have to mean you can't have a single streaming service or go out to dinner once a month. It just means you need to be careful.

Move on to regular expenses if you're in a serious crunch

If there's a prolonged stock market downturn during retirement and you see your savings rapidly dwindling, that's a sign that you may need to start rethinking some essential expenses. If the market is showing no signs of recovery and it's a struggle to maintain your large home (and the large property tax bill that comes with it), downsizing could make sense.

It also wouldn't hurt to spend more carefully on essentials if you're in the midst of a lengthy market downturn and feel that you're quickly running out of money. That could mean being more organized when you shop for food and buying on-sale groceries as part of your meal planning.

Protect yourself with a cash cushion

Limiting withdrawals from your retirement accounts during a market downturn could help preserve your savings in a meaningful way. But it's also important to anticipate market declines and have a plan to cope with them.

One of the best ways to protect yourself in a situation like that is to build a cash cushion. Keeping one to three years' worth of living costs in cash could enable you to largely maintain your lifestyle -- even discretionary spending -- without having to touch your portfolio. It also pays to have some of your invested assets outside the stock market (such as in bonds) in case there's a years-long slump.

Try to keep your cool

Even though market downturns are normal, they can be downright terrifying when you're at a stage of life when you need your portfolio for income. But you don't have to rush to extremes the minute things take a turn for the worse.

Stay calm, assess your expenses, and focus on the costs that are easiest to reduce. With any luck, that approach will get you through the worst of things.

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