Market Volatility in Retirement: Are You Prepared?

If you haven’t done so already, determine how much you can withdraw from your portfolio each year while maintaining a high degree of confidence that your money will last throughout a 30-year retirement. One common rule of thumb is for retirees to withdraw 4% of their portfolios in the first year of retirement and then adjust that amount for inflation every year thereafter.

While that’s fine as a general rule, it can be difficult to follow, is not personalized, and the 4% withdrawal amount is only relevant in the first year of a 30-year retirement. You can get a more precise, personalized, and dynamic calculation by creating a plan with a professional financial planner or using online tools or solutions. These can map your withdrawals and spending in various types of markets, using projections to estimate the probability of your savings going the distance, and even help distribute cash or sell investments through a rebalancing process to send money monthly when you need it. Market changes—both up and down—can affect those probabilities.

If the probability of your savings sufficing to cover your retirement expenses is 80% to 90% or more, that’s good. Very good, in fact. However, if it drops below 75% or thereabouts, it may make sense to make small, temporary adjustments to keep your plan on track. For example, ask yourself if you can skip an inflation adjustment this year, or make reductions in less essential expenses. If the likelihood is lower than 75%, we suggest considering more sizable adjustments in spending from the portfolio to allow time for a potential rebound in the markets.

If likelihoods of money lasting and probabilities sound complex—which they may—that’s normal, and natural. It can be challenging for most of us to think in these terms. The good news is you can get help, from a financial professional, planner, or modern retirement income solutions or technology.

Start by tracking recent spending, and then drawing up a budget. Budgets are never fun. But it’s helpful to know what you are spending on what. That will give you a sense of where you could adjust. Not every expense is a necessity, and tracking recent spending helps clarify what is.  

Group your expenses in terms of needs, wants, and wishes. Your needs are the essentials—think food, housing, health care, insurance, and taxes. Wants are the nice-to-haves like eating out, a gym membership, or travel. Wishes are the things you’d do if you had unlimited time and money.

Cutting back on wants and wishes is the place to start. For example, can you limit how often you eat in restaurants, or choose less-expensive ones? Can you postpone buying a new car or taking a trip? Even small adjustments to reduce the need to sell investments that have dropped in value in a down market, if you can, can make a significant difference in helping your investments last through retirement.

Do you have an emergency or rainy-day fund? Do you have any cash sitting around in an old, neglected account? This is the time to think about using it. If you're expecting a tax refund, then consider filing right away. If you're expecting a tax bill, start saving for it immediately, rather than letting it sneak up on you come Tax Day.

You could also get creative. Do you have things you could consider selling? Also, see if a refund can be issued on any pre-paid annual subscriptions you might have. These are often harder to spot on a monthly budget.

Do you own an annuity that you purchased as an investment but haven't "turned on" the income yet? Talk with a financial planner or annuity specialist about whether starting income now would make sense, so you don't have to start drawing from your investment portfolio.

In short, every dollar you can access today from other sources is one you don't have to pull out of your investment portfolio by selling more volatile assets.

Leaving the original investment untouched means it can potentially continue to grow, and potentially yield more dividends and/or interest in the future. Interest is taxed as ordinary income—unless it’s from a municipal bond or municipal bond fund, in which case interest income is often exempt from federal and, potentially, state income taxes. Dividends, on the other hand, are often taxed at the lower capital gains rate of 0%, 15%, or 20%, depending on income level—provided certain requirements, such as minimum holding periods, are met.

One of the useful aspects of interest and dividends is that they are relatively predictable and can create a baseline of cash flow in retirement. It may not be your only source. Generating additional cash by selling investments that have appreciated over time in your portfolio during your periodic or annual portfolio rebalancing can be another way to generate cash flow. But a stream of interest and dividend payments can provide more flexibility, to help limit the amount of investments you might need or choose to sell, in a down market.

The principal from a maturing bond or CD in your taxable account is often the next place to turn. Generally speaking, you won’t owe any taxes on your original principal; an early sale may trigger capital gains taxes if you earn a profit on the sale. We often think of bonds or CDs primarily as investments that generate income, or that diversify a portfolio. They are also used for retirees because the bond or CD has a maturity date, delivering principal back to the investor on that date. This return of principal can be a steady, reliable source of cash flow, to supplement interest and dividends, and help you keep the rest of your portfolio invested for potential growth if a downturn occurs.

Next, consider selling lower-volatility assets, such as short-term bonds or bond funds, that haven’t been as buffeted by the recent market volatility. These types of investments can provide liquidity—that is, money when you need it at a relatively stable price. It is not essential that you own individual bonds or CDs. There are other generally less-volatile investments and funds you can hold in your portfolio that may not return an exact amount of principal at a future date. But ups and downs of the price (net asset value) of short-bond funds, for example, relative to most stock funds, tends to be lower over time.

If asset sales and the recent market turbulence have left your portfolio out of alignment with your long-term allocation, consider looking for opportunities to raise cash by rebalancing. That means selling assets that have risen in value and are now overrepresented in your portfolio relative to your desired allocation, and buying those that have decreased in value. The goal is to return your allocation to its original target.

Start by determining how much cash you'd like to free up and subtract that from your current portfolio balance. Then use that new balance to determine the dollar values for your allocations to stocks, bonds, and cash investments so that they align with the percentages in your target allocation. That will tell you how much of each asset to buy or sell so that you're freeing up the desired amount of cash while keeping your portfolio on target.

If you still need cash, focus on shedding assets whose prospects no longer match your goals. This kind of portfolio maintenance is a good idea in any market, but it can be particularly useful when you're looking for items to sell. A rule of thumb is that if you wouldn't buy more of a particular investment today, then you should consider selling it.

Do you have any assets in taxable non-retirement accounts that have fallen in value? You can use those losses to offset gains you may have realized in your taxable accounts over the course of the year, which can help reduce your tax liability—a strategy known as tax-loss harvesting. Even if you have no gains to counteract, you can still use your losses to offset up to $3,000 of ordinary income per tax year until all your losses have been accounted for.

If, after harvesting all your losses, you still need to sell assets from taxable accounts to meet your cash needs, be sure to make tax-efficient choices. For example, consider selling investments you’ve held for more than a year. Any gains on stocks, bonds, and mutual funds held for more than one year are taxed at a maximum federal long-term capital gains rate of 20%, whereas investments held for a year or less are taxed at your federal ordinary income tax rate. Some gains may be subject to state and local taxes as well.

It’s impossible to say with certainty what the future holds, but anything you can do to lighten your reliance on large withdrawals from retirement savings during a downturn can help preserve your savings over the longer term. Even small reductions to withdrawals can go a long way toward giving your portfolio time to recover and helping your savings last. Withdrawals in retirement can also have many moving parts, choices, as well as emotion involved. You don’t have to do it alone. Seek counsel, and support, from a trusted advisor, planner, tools, or solutions—on your terms, and in ways that work for you—to help.