Market Declines 40% in Year 1 of Retirement — What Do I Do?!?
When you are young, you often feel invincible. “Just buy the S&P 500 and let it ride” or “Buy the dip” are common investing narratives people are sold on. While these strategies can often work well when you have 20 or more years until retirement, what strategy should you use when you only have a few working years left?
There are at least three unique stages of life when it comes to investing. Some may argue for more stages based on certain nuances, but for simplicity’s sake, we will discuss three in this post:
- Working Years
- Pre-Retirement
- Retirement
During your working years, many of the typical investing adages generally apply. Assuming you have a proper emergency fund, it is often reasonable to simply buy the market and let it ride. However, as you begin approaching retirement, large market downturns can become much more concerning.
If you are counting on retiring with a $2,000,000 portfolio and you experience a 30% decline right before retirement, your portfolio suddenly drops to $1,400,000. That is a significant difference! Regardless of the amount you hope to retire with, that type of decline feels scary.
Furthermore, experiencing that kind of downturn during retirement can place even greater strain on a portfolio. If you are withdrawing $120,000 annually from that portfolio, after a 30% market decline and your withdrawal, the balance could fall to roughly $1,280,000. On top of that, withdrawals during a downturn make it even harder for the account to recover to its previous value.
For pre-retirees and retirees, there is no “one-size-fits-all” solution. However, there are principles that can help guide how you invest. One strategy we use at Cornerstone is a three-bucket approach.
For this post, we will focus on the “short-term bucket.” With this bucket, we determine how much money you will need to withdraw from your investments during the first 4–5 years of retirement. We then make sure you have at least that amount invested in very secure investments that still offer some upside potential, but are unlikely to decline significantly in value.
For example, if you plan to withdraw $100,000 per year from your portfolio during retirement, we may recommend keeping approximately $500,000 invested conservatively to help protect against a 30% or greater market correction. This bucket allows us to pull income from investments that likely have not declined as much as the broader market during periods of volatility.
We have seen this strategy provide tremendous peace of mind for clients transitioning into retirement and adjusting from years of contributing to their portfolios to now drawing income from them.
With this strategy, the money that is not in the “short-term bucket” can be invested more aggressively for long-term appreciation potential. These more aggressive investments should also create less stress because you have the confidence and stability provided by the short-term bucket.
OneAscent Financial Services, LLC (“OAFS”), d/b/a The Cornerstone Financial Group, is a registered investment adviser with the United States Securities and Exchange Commission. OAFS does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by OAFS or any unaffiliated third party. OAFS is neither an attorney nor accountant, and no portion of the presented content should be interpreted as legal, accounting, or tax advice. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly.