Dealing With Market Crashes During Retirement

Throughout history markets have recovered from crashes given enough time. However, if you are in retirement, you may not have time to wait for the market to recover. You may be forced to sell at lower price to fund your retirement. But a downturn is manageable with adequate preparation. In this article, we will go over how to deal with market crashes during retirement.

Strengthen Your Portfolio

You cannot prevent market downturns, but you can build in flexibility and resiliency to ride one out. There are three tips you can implement to help you do this.

1. Revisit Asset Allocation

The exact amounts you hold in equities, fixed income, alternatives, and cash will play a role in how your portfolio handles market volatility. The closer you get to retirement the more you should phase out riskier investments in favor of those with less risk.

2. Diversify

Your portfolio should be invested across industries, company sizes, and geographies. This way if one area begins to struggle-hopefully another can help stabilize things. You should avoid overconcentration in a single sector, stock, or idea. For example, being heavily invested in tech related stocks. Your diversification should be looked at with a holistic approach and factor in all your accounts.

3. Short Term Reserve

Having sufficient cash reserve can help you to absorb hits from an immediate market drop. You should maintain 1-2 years of anticipated withdrawals in a high liquidity, low risk account. This could include a savings account or money market fund or short-term bond. Additionally, if you are receiving social security benefits or a pension, those funds can stabilize you and reduce the number of investments you need to draw from.

When to Withdraw

One way to deal with market crashes during retirement is to be careful how you make withdrawals from your accounts. You should start your distributions with taxable accounts like brokerage or non-qualified investment accounts. This will allow your tax advantage accounts to keep compounding. These taxable accounts can help generate tax efficient income if you keep investments long term and rely on dividends. Next you should move on to tax-deferred accounts. These include Traditional IRAs, 401ks, and 403bs. These distributions are taxed as ordinary income and you may find yourself pushed into a higher tax bracket if you are not careful. Lastly, you should withdraw from Roth IRAs, this is because they grow and distribute tax free.

When to Retire?

It is important to remember that 7 out of 10 years tend to have positive markets. But past performance does not guarantee future results, but looking at historical patterns can help reduce fear. Those who hold on tend to recover and move forward. You also can build a strong foundation that will help you deal with market crashes during retirement. This would include diversifying your portfolio, having multiple income streams, and adequate cash reserves. You can weather a market downturn without sacrificing your goals and desired lifestyle.

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