How to Handle a Market Downturn If You’re Nearing Retirement

If you’re nearing retirement, a market downturn can be anxiety-producing. But it doesn’t have to be devastating. Consider these tips to keep your retirement plans on track. 

Many investors understand the importance of staying invested for the long run. Yet in a market downturn, doing so is often easier said than done.

Indeed, investors have historically been rewarded for staying the course long-term. However, as you approach retirement, you may feel like you don’t have as much time to recoup your losses. This may be especially true if you plan to draw from your investments to fund your lifestyle.

But that doesn’t mean you should panic and go to cash, either. In fact, selling your investments in a downturn can set you back even further on the progress you’ve made towards your financial goals.

Instead, consider these five tips for how to handle a market downturn if you’re nearing retirement.

Consider these five tips for how to handle a market downturn if you’re nearing retirement:

Tip #1: Make sure your asset allocation is in line with your goals.

Downturns often occur after a prolonged period of market growth. And while investors typically welcome capital appreciation, it can also cause unintended risks in your portfolio. For example:

  1. First, continued success in the market can lead investors to take bigger risks. It’s hard to stick with a low-risk portfolio when it seems like everything is going up. This can cause investors to allocate their portfolios more aggressively, replacing lower-risk assets like bonds or treasuries with higher-risk assets like equities.
  2. Second, higher-risk assets like equities usually experience the greatest returns when the market is up. Left unchecked, this can push your portfolio out of alignment with your target asset allocation.

Together, these two circumstances can push investors into a riskier portfolio than appropriate for your objectives. Unfortunately, this can be problematic and costly during a market downturn.

The key is to adjust your asset allocation accordingly as your financial circumstances, goals, and time horizon change. That means if you’re nearing retirement, your portfolio should be designed to withstand temporary losses without setting you back on your retirement timeline. In other words, you may have a higher allocation to historically stable investments like bonds and cash equivalents. Meanwhile, you’ll likely have less exposure to more volatile investments like equities.

This is where the value of professional advice and financial planning often comes into play. Consider working with a trusted financial advisor, who can help ensure you’re financially prepared for retirement no matter how the market behaves.

Tip #2: Keep ample cash reserves on hand.

Selling your investments when the market is down can exacerbate losses. It can also make it more difficult to recover when the tide turns. Unfortunately, if you’re in a situation where your cash reserves are low, you may not have a choice.

As a rule of thumb, most financial experts recommend keeping somewhere between 6 to 12 months of living expenses saved in cash or cash-like equivalents. But for retirees or soon-to-be retirees, many experts recommend keeping even more in cash reserves—typically somewhere between 1 to 3 years of living expenses, depending on your unique situation.

This can be incredibly impactful in the first few years of retirement to help new retirees avoid sequence of return risk—the risk that the market drops in your first few years of retirement. Having ample cash reserves can help you avoid untimely withdrawals from your investment portfolio, so you’re in a better position to recoup your losses when the market eventually recovers.

Tip #3: Consider the value of income-generating investments.

As you approach retirement, it’s essential to consider that the strategy that got you here may not be the best strategy going forward.

For example, as you’re saving for retirement during your working years, it often makes sense to invest aggressively. Not only do you have time on your side, but your wages can also cover your day-to-day living expenses, so you’re unlikely to need access to your investments.

However, many retirees rely on their investments to generate income once they stop working. And if you’ve been primarily focused on capital appreciation to this point, your portfolio may not have the income-generating potential you need in retirement.

If you’re nearing retirement, you may want to consider the role of fixed income and dividend-paying investments in your portfolio. These investments can help you avoid dipping into principal to pay your bills, which can be critical during a market downturn. At the same time, they often fare better in down markets as investors flee riskier investments.

Tip #4: If possible, consider reducing your spending when the market is down.

Though it’s not always feasible, reducing your spending when the market is down can help you preserve more of your nest egg long-term. We call this a dynamic distribution approach to retirement planning.

Instead of withdrawing the same amount from your portfolio regardless of what the market is doing, a dynamic distribution strategy assumes you’ll lower your spending in down years. Meanwhile, you may increase your distributions when the market is up.

This helps limit the negative impact of large withdrawals during a market downturn, saving those withdrawals for positive market years. If you’re nearing retirement and the market is down, finding ways to reduce your spending early on can help set you up for success in later years.

Tip #5: If you’re nearing retirement, maintain the mindset of a long-term investor.

Lastly, remember that even though you’re approaching retirement, you still have a long way to go.

It can be easy to get nervous as you approach retirement during a market downturn. However, do your best to zoom out and see the bigger picture. Assuming you’re in good health, you’ll have decades for your portfolio to recover as you enjoy a long and healthy retirement.

Remember, the market typically rewards investors who create and stick to a plan long-term. That means as you near retirement, it’s even more important to avoid reacting emotionally to disappointing markets. Instead, maintain the mindset of a long-term investor and focus on the things you can control.

A Trusted Advisor Can Help You Prepare for a Market Downturn if You’re Nearing Retirement

At Milestone Asset Management Group, we offer our clients the peace of mind that comes from working with a trusted and experienced financial advisor. We specialize in helping our clients plan for a healthy and secure retirement while handling all of their tax planning, preparation, and estate planning needs in-house.

We know our clients are busy balancing work and family life, often leaving little time to manage their own money. And we also understand the importance of a solid financial plan, especially while approaching retirement during a market downturn. If you’re interested in discussing your retirement plan with a trusted financial advisor, please schedule an introductory phone call.