When mapping out the sources and timing of your retirement income payments, there’s an important risk we want to make investors aware of: withdrawing money from your portfolio during down markets.
If you’re not careful, withdrawing money while the market declines can significantly impact your portfolio and your ability to meet your long-term retirement goals.
This risk is especially palpable if you’re in the early stages of retirement, because it can be difficult to replenish your portfolio over time. During down markets, investors should consider adjusting their withdrawal rates and exploring other sources of retirement income.
Your Withdrawal Rate Can Increase During Down Markets
Let’s say you have a $1,000,000 portfolio, and you’re withdrawing 5% ($50,000) a year for retirement income. Then your portfolio goes to $750,000 during a market decline, and you continue withdrawing $50,000 in income. Your withdrawal rate has now jumped from 5% to a little over 6.5% a year! We’ve written before about the potentially adverse effects of increasing your withdrawal rate even by just 1%, and in this case you could really see an impact.
What’s more, you’re making withdrawals at a time when your portfolio will need to experience substantial gains to make up for its decline. In fact, you’ll need a 33% return (with no withdrawals) to make up for the 25% loss your portfolio experienced just to get it back to $1,000,000. If you continue withdrawing for your portfolio, you’ll need even bigger gains.
3 Ways to Manage Your Retirement Income During Down Markets
1) Consider Reducing Your Retirement Income Withdrawals
This can remove some of that downward pressure from the portfolio. We’ve written before about ways to monitor your spending in retirement, which you can read here.
2) Explore Alternate Sources of Retirement Income
An investment plan can help show you options, such as only pulling cash generated through dividends or fixed income coupon payments.
3) Adjust Your Portfolio Allocation for More Growth
This could help achieve better overall returns over time. This last piece could help make up for the losses over time, however it’s important that you have a long time horizon and check with your financial advisor that this option makes sense.
Manage Your Retirement Income with an Investment Plan
An investment plan can serve as your guide to knowing what adjustments you need to make throughout retirement to keep your portfolio on track.
If the market experiences declines as you’re taking retirement income withdrawals, we’d strongly recommend you work with your financial advisor to consider making adjustments.
One of our Wealth Managers can take the time to build an investment plan for you, to help you stay on track for your long-term retirement goals. Get started here, or call us today at 1-800-541-7774 to take the next steps.
