Retired or nearly there? How to weather a market downturn

Liz Weston Nerdwallet

A bad stock market is unsettling for any investor. For retirees and near-retirees, though, bad markets can be dangerous. Stock market losses early in retirement can significantly increase your chances of running short of money. But there are ways to mitigate the risk. Financial planners say the following actions can help make your money last.


When the stock market is booming, investors can be tempted to “let it ride” rather than regularly rebalancing back to a target mix of stocks, bonds and cash. Not rebalancing, though, means those investors probably have way too much of their portfolios in stocks when a downturn hits.

The right asset allocation depends on your income needs and risk tolerance, among other factors, but many financial planners recommend retirees keep a few years’ worth of withdrawals in safer investments to mitigate the urge to sell when stocks fall.

Certified financial planner Lawrence Heller of Melville, New York, uses the “bucket” strategy to avoid selling in down markets. Heller typically has clients keep one to three years’ worth of expenses in cash, plus seven to nine years’ worth in bonds, giving them 10 years before they would have to sell any stocks.

“That should be enough time to ride out a correction,” Heller said.

Near-retirees who use target-date funds or computerised robo-advisors to invest for retirement don’t have to worry about regular rebalancing — that’s done automatically. But they may want to consider switching to a more conservative mix if stocks make up over half of their portfolios.

Liz Weston, a columnist for personal finance website PHOTO: AP


Historically, retirees could minimise the risk of running out of money by withdrawing four per cent of their portfolios in the first year of retirement and increasing the withdrawal amount by the inflation rate each year after that. This approach, pioneered by financial planner and researcher Bill Bengen, became known as the “four per cent rule.”

Some researchers worry that the rule might not work in extended periods of low returns. One alternative is to start withdrawals at about three per cent.

Another approach is to forgo inflation adjustments in bad years. Derek Tharp, a researcher with financial planning site, found that retirees could start at an initial 4.5 per cent withdrawal rate if they were willing to trim their spending by three per cent — which is equivalent to the average inflation adjustment — after years when their portfolios lost money.

“You don’t actually cut your spending. You just don’t increase it for inflation,” said certified financial planner Michael Kitces.


Reducing expenses trims the amount that retirees must take from their portfolios during bad markets. That’s why Melissa Sotudeh, a certified financial planner in Rockville, Maryland, recommends paying off debt before retirement.

She also suggests clients maximise Social Security checks. Benefits increase by about five per cent to eight per cent for each year people put off starting Social Security after age 62. (Benefits max out at age 70.) The more guaranteed income people have, the less they may have to lean on their portfolios.


Ideally, retirees would have enough guaranteed income from Social Security and pensions to cover all of their basic expenses, such as housing, food, utilities, transportation, taxes and insurance, said Wade Pfau, professor of retirement income at the American College of Financial Services. If they don’t, they may be able to create more guaranteed income using fixed annuities or reverse mortgages, said Pfau, author of Safety-First Retirement Planning: An Integrated Approach for a Worry-Free Retirement.

Fixed income annuities allow buyers to pay a lump sum to an insurance company, typically in exchange for monthly payments that can last a lifetime. Reverse mortgages give people age 62 and older access to their equity through lump sums, lines of credit or monthly payments, and the borrowed money doesn’t have to be paid back until the owner sells, dies or moves out.

Covering expenses with guaranteed income actually can free retirees to take more risk with their investment portfolios, which over time can give them better returns and more money to spend or leave to their kids, Pfau said.

“They’ll be able to invest more aggressively and still sleep at night because they don’t need that money to fund their day-to-day retirement expenses,” he said.


A survey released in 2020 by the Schwab Center for Financial Research found that among near-retirees — people within five years of retirement — 72 per cent worry they’ll outlive their money and 57 per cent feel overwhelmed about determining how much they can spend.

Yet most people don’t consult financial planners to make sure their investment, withdrawal and Social Security claiming strategies make sense.

Getting that second opinion, preferably from a fiduciary advisor committed to your best interests, is critical. Advisors use powerful software as well as knowledge gained from guiding many clients though retirement, said Rob Williams, the research centre’s vice president of financial planning, retirement income and wealth management.