For those with decades until retirement, the market’s swings are just a part of the investing process. As long as your asset allocation is in line with your risk tolerance, you can more or less sit back, ignore daily movements and turn off CNN when things get rocky. But for new retirees and those just a few years away, a tanking market is a scarier prospect.
If that’s you, you need to start moving some of your assets around to a less risky mix. First, though, a word of caution: Don’t overreact to minor dips or day to day gyrations, even if you’re close to retirement. Jonathan Clements, founder of the Humble Dollar, writes for Money.com:
Even if a market decline knocks 20 percent or 30 percent off the value of your stock portfolio, it’s unlikely your total wealth has declined that much. After all, you might have money in bonds and bank accounts, a home that you own, your future Social Security benefits, any pension you’re entitled to, and—maybe most important—your income-earning ability, all of which remain as valuable as ever.
“Viewing portfolio losses as a percentage of your net worth can be a lot less scary than looking at portfolio losses in absolute dollars,” seconds Dirk Cotton, who writes the Retirement Café blog.
All of that said, a down market in the early years of retirement can have reverberations throughout the rest of it. If you need to sell stocks at a lower price to cover your cost of living, you’ll have fewer shares overall off of which to keep earning in the future, and to sell in later years. You can see how that compounds. Near-retirees in 2000/2001 and 2008 know this well.
While some liquidity, which we’ll address more below, is your friend, that doesn’t mean you need to be all cash. In fact, you shouldn’t be. If you’re in your 60s, for example, and in relatively good health, you may have decades in retirement. You still need to generate some money, says Terry Eisert, founder and owner of Eisert Wealth Management in Cincinnati, Ohio.
“We can’t ever afford to step back and say ‘I’ve made it,’” says Eisert. “You’ve got to keep doing what you’ve done to get there.” That means continuing to invest a portion of your assets in diverse, low-cost mutual funds and ETFs.
How much to keep invested is up to you and how much you can stomach. If the thought of a drastic drop (think: 2008) makes you nervous, then you need to rethink your asset allocation with a financial advisor. You’re searching for the happy medium between being uber-conservative and uber-aggressive with your money, which is of course easier said than done. Which is where the bucket strategy comes in.
The bucket strategy means having three “buckets” of assets leading to retirement, as explained by Kiplinger:
You divide your retirement money into three buckets: One is for cash that you’ll need in the next year or two, including major expenses, such as a vacation, a car or a new roof. The next is for money you’ll need in the next 10 years. The final bucket is for money you’ll need in the more distant future, either for you or your heirs.
The cash reserve is what we’re focused on here. While cash could mean lower returns, it also means you have security and peace of mind during those rough years. You have that liquid cash foundation to pull from while your investments remain in the market and can hopefully recover from dips. As Kiplinger writes, this first bucket is for when you need money now. (If you want to tweak your stock holdings specifically, this article has some suggestions.)
Another way to prevent a down market from wreaking havoc on your retirement is to continue working or move to part-time work, as the New York Times notes. That way you’re not dependent on withdrawals from your nest egg for day-to-day expenses. Of course, that’s not an answer that will please those looking forward to relaxation, and it’s not an option for everyone, particularly those with health issues or who have been laid off.
But if you can manage it, working even six months longer can have a tremendous effect on your bottom line—it prevents you from selling low, you’ll likely be able to save a little bit more, and you’re potentially delaying taking Social Security a bit longer. It’s a win-win-win.
Remember, too, that your withdrawal rate isn’t one size fits all. Financial advisors suggest a four percent rate, but that doesn’t mean every year will be the same. Likewise, your spending will necessarily fluctuate.
Finally, take this as an opportunity to look over your entire financial picture. If you’re nearing or just reached retirement, you should have a handle on your investments, income, expenses, holdings, net worth, etc. Getting all of that in order will help you cut out things you don’t need and put market declines into perspective.