A significant market decline can be unsettling, especially when retirement is near, or you are already relying on your savings for income. While no one can predict when a downturn will occur or how long it will last, you can ask an important question in advance: How might my retirement plan respond if the market fell 20% shortly after I retired?
The answer depends on more than the market’s movement. Your investments, income sources, spending needs and time horizon all play a part. Looking at these factors together can help you identify potential vulnerabilities and consider your options before emotions enter the picture.
A market decline isn’t necessarily the same as a portfolio decline
If a stock market index falls 20%, your portfolio could fall more or less than 20%. Your results depend on what you own and how those investments behave. Stocks, bonds, cash and other assets can respond differently to market conditions, although several types of investments can decline at the same time.
Diversification and an appropriate investment mix can help manage risk, but neither guarantees a profit or protects against loss in declining markets. Reviewing your actual holdings is a useful starting point for understanding your exposure.
The rules for saving for retirement and withdrawing in retirement are different
During your working years, you may be adding to your investments regularly and have time before you need the money. A market decline can still be uncomfortable, but ongoing contributions and a longer time horizon change how it affects your plan. Neither ongoing contributions nor a longer time horizon guarantees a recovery or prevents losses.
In retirement, the direction of cash flow often changes. Instead of adding to savings, you may need to draw from them to help pay expenses. A decline shortly after retirement, combined with withdrawals, can leave fewer assets in place to benefit if markets later recover. That makes both your income strategy and your approach to investment risk important parts of the plan.
Withdrawals can make the timing of a decline matter
A downturn early in retirement can be particularly challenging when you are taking regular withdrawals. Selling investments after they have fallen may leave fewer assets available to participate in a future recovery. This is sometimes called sequence-of-returns risk: the order in which investment gains and losses occur can affect how long a portfolio lasts when money is being withdrawn.
A retirement plan can explore how a decline at different points might affect your savings. It can also consider whether you have flexibility in the timing or amount of certain expenses. Weigh any changes against your needs, taxes, and longer-term goals.
Know where your income would come from
Before a downturn, it helps to understand which expenses are covered by Social Security, pensions or other income sources and how much must come from savings. You can also review what cash or other readily accessible resources are available for near-term needs.
Holding cash has trade-offs, including the risk that inflation will reduce its purchasing power. No single reserve amount is right for everyone. The appropriate approach depends on your circumstances and the rest of your plan.
Review your plan, not just your account balance
A stress test uses assumptions to explore how a plan might hold up under unfavorable conditions. It might look at a market decline, a slower recovery, higher inflation or unexpected expenses. The results are illustrations, not predictions or guarantees, but they can help you ask practical questions:
- Would my expected income still cover essential expenses?
- How might withdrawals affect the portfolio after a decline?
- Which expenses could I adjust if needed?
- Does my investment mix still reflect my goals, time horizon and comfort with risk?
- Would rebalancing be appropriate, after considering taxes and transaction costs?
The goal is to understand the choices available to you, not to react to every headline. Selling solely in response to a decline can lock in losses and may mean missing a subsequent recovery. At the same time, a significant change in your circumstances may justify revisiting your plan.
Prepare before the next downturn
A 20% market decline is a scenario worth planning for; it’s happened before and it can happen again. A thoughtful review can help you understand how market risk, income and spending fit together and where adjustments may be worth considering.
At RGA, we can help you stress-test your retirement approach against different market scenarios and discuss what the results may mean for your goals. Talk to us today and get ahead of the curve.
This article is for educational purposes and is not individualized investment, tax or legal advice. Investing involves risk, including possible loss of principal. Past performance does not guarantee future results.
