Client Conversations

Retiring in a Volatile Market

Judith Ward, CFP®, Senior Financial Planner
Key Highlights:
  • Three things to be mindful of when retiring in a down market are your asset allocation, how much you’ll need to withdraw in retirement, and flexibility around the timing of your retirement.
  • For retirees or those close to retirement, it’s important to understand what your income sources are going to be, such as Social Security or pension benefits.
  • Prior to retirement, set aside one to two years of expenses in cash so that you won’t need to spend from your stocks or bonds during a period of market volatility.

What should I do if I’m retiring in a volatile market?

Well, if retiring during a volatile market, I think the first thing investors should keep in mind is how they’re diversified. Check your asset allocation, especially if you’re going to be drawing from your portfolio soon after you retire. I think it’s important, as you get close to retirement, that you have more of a balanced approach, a mix of stocks and bonds, with a range of 50% to 60% in stocks. And you want those bonds to help provide a buffer should the market get volatile, so it’s important to, again, check your diversification.

Secondly, think about, if you are going to be drawing from your portfolio, how much you’re going to have to withdraw. This is where we talk about the 4% rule. And so what that means is, it is a conservative withdrawal amount. As you’re entering retirement, its 4% of the amount of your balance at retirement. So, if you have a balance of, say, half a million dollars, then it’s going to be $20,000 in the first year. If you have a $1 million portfolio, it’s going to be $40,000 in the first year that you might consider spending. Some people call it a safe withdrawal amount, but it guards against the unknown in the first few years of retirement. If you start out with a conservative amount in mind, then it gives you flexibility later, but you should consider reassessing your situation every year.

Lastly, I would say maybe allow yourself some flexibility. Try to have a plan A and maybe a B and a C. And if you can have some flexibility about the timing of your retirement and when you retire, you know, if things are looking nasty in the market, ask yourself “Can I hang in there a couple more years?” Try to have some flexibility around the time you do retire.

So those are the three things to be mindful of when retiring in a down market—your asset allocation, how much you might have to withdraw at retirement, and giving yourself some flexibility.

During volatile markets, what can I control?

During market volatility there’s a lot that is out of our hands, that we can’t control. One of the things we can control is our asset allocation. Another big lever for retirees is their spending in retirement, and that can really make a difference throughout your retirement. So, for retirees or those close to or entering retirement, it’s important to really understand what your income sources are going to be in retirement. What are going to be your predictable incomes, such as Social Security benefits? Maybe you have some pension benefits. How reliant are you going to be on your portfolio? You really need to have those items in mind as you enter retirement because then, when you assess your spending needs, you can determine your essential spending needs and what is going to be discretionary. Ideally, you’d like to match up your predictable income sources with your essential spending needs. And then discretionary needs could be taken out of your portfolio.

It’s important to know that breakdown because if market volatility does hit, and you might feel the need to tighten the belt a little bit, you kind of know what discretionary expenses you might be able to make—those trade-off decisions about what you’re going to spend money on and what you’re not. It’s a good idea to really do your homework and understand how you’re going to be spending your money in retirement.

Investors might already be in retirement and are going through market volatility again. That spending lever is just so important for retirees, and it might be preferable to make temporary spending adjustments rather than drastic portfolio changes.

With a little planning prior to retiring, you may want to consider having an emergency fund on the side. Set aside up to two years of spending needs that you have accessible in cash, and that way, if you’re anxious, you don’t have to spend from your stocks or bonds. Instead, you’ll have cash that you can use. A friend of mine calls that his “sleep at night money.” So, I think that’s a good idea for retirees to consider.

Lastly, keep in mind, you know, what’s happening in the headlines may not be what’s happening in your account. The headlines are stock market-oriented, and if you have a mix of stocks and bonds, your portfolio might be holding up a little better than what you might think when you look at the headlines.

Important Information

This material has been prepared by T. Rowe Price for general and educational purposes only. This material does not provide fiduciary recommendations concerning investments, nor is it intended to serve as the primary basis for investment decision-making. T. Rowe Price, its affiliates, and its associates do not provide legal or tax advice. Any tax-related discussion contained in this material, including any attachments/links, is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding any tax penalties or (ii) promoting, marketing, or recommending to any other party any transaction or matter addressed herein. Please consult your independent legal counsel and/or professional tax advisor regarding any legal or tax issues raised in this material.

The views contained herein are those of the authors as of April 2020 and are subject to change without notice; these views may differ from those of other T. Rowe Price associates.

Information contained herein is based upon sources we consider to be reliable; we do not, however, guarantee its accuracy.

Past performance is not a reliable indicator of future performance. All investments are subject to market risk, including the possible loss of principal.

T. Rowe Price Investment Services, Inc., Distributor.

© 2020 T. Rowe Price. All rights reserved. T. Rowe Price, INVEST WITH CONFIDENCE, and the Bighorn Sheep design are, collectively and/or apart, trademarks of T. Rowe Price Group, Inc.

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