How to Retire in a Declining Market: 5 Ideas to Help You Prepare

Lately, there has been a feeling of financial chaos in the world. The stock market is constantly fluctuating, and it seems like every other day there's a new headline about the state of the economy. For many people, this can be cause for concern when it comes to retirement. How will you be able to retire if the market keeps declining? I can assure you that you can prepare to retire during a declining market, you just need to be prepared. Here are five ideas to help you get started.

  1. Know Your Cash Flow. Have a Budget - One of the most important things you can do when preparing for retirement is to know your cash flow. This means understanding how much money is coming in and going out each month. It’s one thing to know it. It’s another to document it. This reference will allow you to refer to and test your cash flow assumptions.  There are several ways to track your cash flow, so find one that works best for you and make sure to update it regularly. Once you know your cash flow, you can start creating a budget. This will help you stay on track and keep your cash flow steady. It’s important to consider changes in expenses in retirement. Some common expenses include things like healthcare costs and travel. Next, forecast what income you will have in retirement from pensions, social security, and other investment sources. Review your budget annually and make changes as needed.
  2. Build Up a Reserve – An emergency fund is an important tool to help ride out the unexpected. This will help you avoid having to sell investments at a loss or pay penalties in taxes and fees. Typically, we recommend that clients keep at least two to four years of distribution in a "war chest" type of investment. These might be short-term bonds, treasury inflation-protected securities, or money market funds. When markets are up, these assets have a limited return; however, when markets are down, they tend to lose value slowly. The goal of having this "war chest" is twofold: 1) to act as a behavioral tool to assist you in keeping the rest of your funds invested during market downturns since you'll know you have secure assets to draw from, and 2) to withdraw from if needed. When markets are rising, it's usually preferable to pull money from your growth-oriented investment mix. However, if markets are falling, it is usually more advantageous to let those assets recover and use money from your war chest.
  3. Remove Emotions - We all know it's more difficult to do than it sounds. We hope that the previous two activities helped you to maintain logic when your emotions are telling you to panic. When markets have fallen, there is usually a tiny sliver of you that thinks this is an excellent opportunity for deploying excess cash into the market. When you were building wealth, the market trends were generally similar in magnitude. The dollar swings, however, will be the biggest surges you've ever seen because your portfolio is likely as big as it has ever been.

I'll use a $1 million portfolio as an example. If you have a 20% swing in your portfolio, it's equivalent to a $200,000 shift. Compare that to a portfolio of $500,000 just 6-8 years earlier with the same percentage swing but half the dollar swing. I know this is basic arithmetic, and it's a simple idea, yet when someone first encounters it in retirement, it might be quite shocking. That's why I recommend you get ready for these sorts of situations and keep in mind that you have a strategy in place. We advise clients that equities will drop by 20% or more six to seven times during their retirement.

  1. Consider Working Part-Time – For some, working part-time in retirement can help you boost your income and offset any losses you may have incurred in the market. If you're healthy and able to work, consider doing so for at least a few years after you retire. This will give you time to ride out any market downturns and still have some money coming in each month. Working part-time can also help you emotionally transition from full-time employee to full-time retiree and allows you to utilize your years of experience through consulting.
  2. Make Choices as You Need To - Once you know your projected cash flow, you have a reserve "war chest" and you know if you want to take on part-time work, you can make choices as you need to if the markets decide to act out. It could be as easy as limiting your travel for a few years or deciding to start taking distributions from your war chest so your investments can weather the storm.
    Having options is the key.

Retirement is a time when we all hope to spend our time on what is most important. We also know that life, and the markets can throw curveballs. This is why at Moscaret Investment Advisory, we work with you to create a comprehensive retirement plan to weather not only the sunny days but the stormy ones too. Contact me to discuss your retirement plan and how we can work together to make sure you are prepared for whatever the markets might do.