While more workers are confident that their nest eggs will last through their retirement years, the same forces driving this confidence could work against new retirees going forward. Workers often retire when the market is cresting, which can reduce a portfolio’s durability.
Though bumps in the road are unavoidable for any long-term investment horizon, these inevitable downturns can be especially painful for new retirees. While retirees have no control over when stocks drop, bond yields rise, or inflation emerges, Morningstar’s director of personal finance Christine Benz offered ways to protect a portfolio if the market enters bear country at the start of retirement.
Delay the Date, Not the Gratification
For investors considering retirement but worried about eliminating a steady paycheck in a market that could experience a downturn, one idea would be to start with a work/retirement hybrid. Morningstar contributor Mark Miller has written about “encore careers” — work that’s less remunerative but more enjoyable than one’s main career and undertaken before permanently retiring.
Alternatively, workers can engage in a “pre-tirement” strategy in which they keep their jobs but spend additional retirement contributions on travel and leisure instead of saving them, since contributions made later in life are less impactful than those made early on.
While those who hate their jobs may want to find an escape hatch, those who like their jobs or can find work they enjoy may want to continue working, as the benefits such as delayed portfolio withdrawals, delayed Social Security filing, and not retiring into an at-risk market can improve a portfolio’s long-term durability.
Seek Portfolio Balance
Retirees’ allocations to stocks should start out more conservative and rise over time to help circumvent risk. Once retirees are safely through the danger zone of losing a lot of money in their early retirement years, they can then increase equity exposure in the portfolio.
New retirees can allocate a healthy portion of their portfolios to safer securities like cash and high-quality short- and intermediate-term bonds. If they encounter a weak market right out of the gate, they can spend from the stable assets while leaving the more volatile assets to recover.
Keep Discrete Holdings for Rebalancing Opportunities
In her series of bucket portfolio stress tests, Benz noted that something in her model portfolios always did reasonably well at some point, even during the global financial crisis.
In these simulations, these outperforming positions offered the chance to use these appreciated positions to spend, refill the cash reserves, or top up depreciated positions. Having discrete U.S. stock, international stock, and bond components, along with a cash sleeve, can ensure that a retiree never has to tap a position when it’s down.
Spend Less During Market Downturns
The early retirement years tend to be the high spending years, since that’s when retirees satisfy their demand for travel and leisure activities. However, retirees should rein in their spending during market downturns, if possible. Reducing spending is one way for retirees to regain control amid uncertainty. New retirees concerned about market volatility could start with a modest withdrawal rate. Retirees could also ratchet down their spending if they encounter a weak market and potentially spend more in an upward-trending one.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.