Stock market turbulence is never fun to deal with. But if you’re about to retire, it can be especially upsetting and stressful.
Once you stop working, you’ll probably rely on your retirement savings for income. And if you start doing that at a time when the market is all over the place, you run the risk of having to take losses on your portfolio right from the start that you may never recover from.
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The good news, however, is that market volatility early on doesn’t have to derail your retirement plans. With the right approach, you can safeguard your savings without having to postpone leaving for work.
If you start tapping into your IRA or 401(k) at a time when your investments are low, you’ll risk permanent losses. That’s why it’s important to create a cash reserve.
Cash won’t lose value in a volatile market like stocks can. So, if you have enough cash to cover a couple of years of living expenses, you’ll have the option of leaving your portfolio intact if its value drops. This can be especially valuable early in retirement, when accumulated losses can be most painful.
You may have a certain retirement plan when you retire. But in a volatile market, it pays to be flexible.
It may be that your original plan was to withdraw $100,000 from your IRA in your first year of retirement and adjust future withdrawals for inflation. If your portfolio grows or even remains stable at the beginning of your retirement, that plan may be feasible. But if it starts to lose value due to market volatility, it’s a good idea to adjust your withdrawals downward to preserve savings.
In this example, that might mean taking a look at the discretionary part of your budget and reducing spending there. And that could translate to withdrawing $90,000 in your first year of retirement instead of $100,000.
Will that mean your first year of retirement may not be as you expected? Unfortunately, yes. But reducing spending and withdrawals in reaction to market volatility could be what helps you avoid running out of money in the future.
Retreating into a volatile market is far from ideal. But it is not something totally unusual either. The key is to focus on building a cash reserve and maintaining flexibility so that an initial bout of turbulence doesn’t derail your long-term plans.