How to Retire in a Volatile Market

Updated: June 14, 2022

Created in collaboration with Kiplinger.

No one can control when market volatility will hit. But when it comes to the impact of market fluctuations on your investments, it’s worth knowing that overall market results may not mirror what’s happening with your retirement portfolio.

A critical first step during any market downturn is to stay focused on your long-term financial goals. To help navigate your way through any market challenge, talk with your financial professional. Together, you can consider these six steps to help weather unpredictable markets during retirement or just before.

It can be overwhelming to look at investment statements when the stock market drops sharply. Those who are in or near retirement could consider reducing their exposure to stocks and increasing their holdings in bonds and cash. However, it’s important to remember that although fixed income investment options can be less volatile than equities, they also come with their own set of risks.¹

With any market volatility, use your investment statement as a compass to help guide your financial goals. Meet with your financial professional to review your asset allocation – the percentage of stocks, bonds, and cash in your portfolio – to make sure it still aligns with your risk tolerance and time horizon. For example, you may want your portfolio to be 60% stocks and 40% bonds. If your mix is too heavily weighted in one category – perhaps, you’re now at 50% bonds – consider rebalancing by selling bonds and buying stocks to return to the original allocation.

Similarly, you can gradually rebalance a 401(k) account or other retirement plan during uncertain markets by directing new investment dollars into the asset class that has fallen below its target level.

Though the stock market may be out of your control during economic downturns, it’s a good idea to take charge of your spending and reassess your retirement budget.

First, add up anticipated expenses for the year, such as utilities, mortgage or rent, food, and insurance premiums. Then, subtract guaranteed sources of annual income in retirement, including any pension income, Social Security benefits, or annuity payments. The result is an estimate of the amount of money you will need to withdraw annually from your investment savings.

A general guideline for retirement income planning is a 4% annual withdrawal rate. This recommendation is based on assumptions of how much cash can be safely withdrawn from a portfolio each year (adjusted annually for inflation) to last for a 30-year retirement. In the first year of retirement, you withdraw 4% of savings; in subsequent years, you increase that dollar amount by the rate of inflation.² Here’s an example of how it works:

While the 4% rule is a good starting point, work with your financial professional to calculate a withdrawal rate that’s tailored to your situation. Determining the right amount of money to withdraw can help ensure that your nest egg isn’t depleted too soon.

The bucket system can help retirees determine if they will have enough cash to cover their expenses in the near future, allowing them to invest the rest of their money more aggressively for longer-term needs.

To manage your cash flow, you can divide your retirement money into three buckets depending on when you’ll need it.

• Bucket 1 (money you need now): Contains enough cash to pay living expenses, including major costs like a vacation, for one or two years – or three to be conservative – that otherwise wouldn’t be covered by Social Security benefits, a pension, or an annuity. Keep the money in a readily accessible interest-bearing account. These funds are on top of a separate emergency fund set aside in a savings account to cover unanticipated expenses like a car repair or medical bill.
• Bucket 2 (money you’ll need soon): Contains cash you’ll need in 2-10 years and is often invested in bonds.
• Bucket 3 (money you’ll need later): Contains cash you’ll need in over 10 years. You can replenish bucket 1 using funds from bucket 2 or 3 depending on their investment performance.

Traditional pensions are becoming less common, but investors can build their own pension by considering the purchase of an immediate annuity when they retire. You can buy an immediate annuity from an insurance company with a single lump-sum payment. In return, you receive guaranteed income for life – or for a set number of years. Some immediate annuities also offer flexible options that you may add and customize, such as providing a survivor benefit or increasing yearly income payments to keep up with inflation.

Along with Social Security, a pension, or other guaranteed sources of income, annuities can also help cover discretionary costs in retirement like entertainment, hobbies, or travel. In this way, annuities can help you experience more certainty – no matter what the stock market does.

The timing of when to begin collecting Social Security benefits will largely depend on your personal and financial situation. But market volatility highlights the importance of maximizing guaranteed sources of income. Every year you delay claiming Social Security beyond your full retirement age – 66-67 for workers in their early 60s and younger – your benefit is guaranteed to grow by 8% until age 70.³ And all future cost-of-living adjustments are made on that higher amount.

In addition, married couples can maximize their benefits by claiming Social Security at different ages.⁴ For example, if the higher earner delays Social Security until age 70, that could lead to a larger survivor benefit.

If your retirement date is flexible, you could consider postponing your retirement by a year or two to give your investment portfolio time to potentially repair itself after a market hit. On average, bear markets from 1929 to 2009 have lasted nearly 20 months and rebounded in about a year after hitting bottom, according to a recent measure.⁵

Every year you delay retirement also provides more time to save money while reducing the number of years that those savings must support expenses. Plus, it can allow you to delay claiming Social Security benefits, enabling you to accumulate a bigger benefit.

Coping with market volatility isn’t easy, but there are ways to reduce risk and preserve your retirement savings. Your financial professional can help you maintain the sustainability of your retirement portfolio so that you feel more secure about the future.