Retirement planning isn't as simple as having a strong portfolio of investments. Depending on your spending habits and your retirement goals, it's most important to have the right mix of investments. That means a portfolio that helps you generate regular income, protects against high taxes and market volatility. There's no way to control market volatility — and it may hit during your retirement. That's why it's essential to be prepared.
Calculate your spending needs
One way to protect yourself against market volatility is knowing how much money you actually need in your retirement. This means taking a strong look at your lifestyle and how much you expect to spend in order to maintain your desired lifestyle.
Consider breaking your expenses into categories: essential expenses (housing, healthcare, food) and discretionary expenses (travel, hobbies, entertainment). Your essential expenses should ideally be covered by guaranteed income sources like Social Security, pensions, or annuities. This way, even during market downturns, your basic needs remain secure.
This is an important first step that will ultimately inform how your retirement plan is constructed — and how it will protect you against market volatility. Many retirees find their spending follows a pattern: higher in early retirement years when they're most active, moderating in middle retirement, and potentially increasing again later due to healthcare costs.
Analyze your risk tolerance
It's important to talk candidly with your advisor about your risk tolerance. Typically, an investor's risk tolerance declines as they get closer to retirement. This makes perfect sense. Your working years are the time for making regular investments with a more aggressive strategy, which can lead to greater returns. After many years in the market, you likely will have accrued gains, which means the next phase of investing is less about chasing large gains and more about protecting what you've built.
If you are especially concerned about market volatility in retirement, then it can make sense to shift to an asset allocation that's more conservative — away from more volatile securities like stocks and moving toward safer assets like bonds. Of course, your risk tolerance may change from year to year. Your advisor can work with you to review your current risk tolerance and rebalance your portfolio accordingly.
Ideally, you have these conversations with your advisor before market volatility strikes, so you are prepared with a contingency plan that makes you comfortable. The last thing you want to do during market uncertainty is make rash decisions that lock in losses or derail your long-term strategy.
Diversify with income-generating investments
One of the ways to protect against market volatility proactively is through income-generating investments. You might be thinking that all investments ideally generate income, which is true! But not all investments produce income in the same way.
With most stocks, investors don't reap the benefits until they actually sell their investment. Income-generating investments, like dividend stocks, are different. These assets provide regular cash flow — usually in the form of quarterly payments — without you having to sell the stock. Although dividend-paying stocks may be affected during times of market volatility, they still provide an additional degree of protection by offering some amount of cash payments.
Annuities are another option for generating regular cash payments. Annuities can be structured in myriad ways, including by funding them with a single lump-sum premium payment or with premiums over time. No matter what option you choose, these vehicles essentially provide you a consistent cash payment for life (although the amount may be fixed or variable, depending on the specific annuity you purchase). For investors seeking an extra layer of comfort to supplement their retirement accounts, annuities can be a very powerful option, providing cash without having to sell off your investment portfolio.
Develop a cash reserve plan
Keeping a portion of your assets reserved in cash can be another way of insulating yourself from market volatility. Once again, the specific amount of your cash reserves will depend on your overall level of assets, your risk tolerance, and unique factors like your monthly income requirements.
A common rule of thumb is to keep one to two years of living expenses in cash or cash equivalents. Placing your cash in a high-yield savings account or money market fund can allow your cash to grow at rates that, at a minimum, often help offset the impact of inflation. This cash cushion means you won't be forced to sell stocks or other investments at depressed prices during a market downturn.
Consider tax-smart withdrawal strategies
Market volatility and taxes often intersect in retirement planning. By strategically withdrawing from different account types — taxable accounts, tax-deferred accounts (traditional IRAs and 401(k)s), and tax-free accounts (Roth IRAs) — you can potentially reduce your tax burden and extend the life of your portfolio.
During down markets, you might consider Roth conversions, moving money from traditional retirement accounts to Roth accounts when asset values are lower. This strategy allows you to pay taxes on a smaller amount and potentially benefit from tax-free growth as the market recovers.
Be aware of lending options
Depending on your asset level, you may be able to receive a loan against your current investments. This can be yet another way to receive an infusion of cash without having to actually liquidate your portfolio during a downturn, although it does come with risks. Especially in times of market volatility, lending against assets can be complicated if they subsequently decline in value, potentially forcing you to liquidate at the worst possible time.
The importance of planning and staying the course
Market volatility is an inherent part of investing. And while we all hope that it doesn't strike during retirement, there are no guarantees about how the market will perform in the future. History shows us that markets have always recovered from downturns, though the timing is impossible to predict.
Perhaps the most important protection against volatility is having a well-thought-out plan and the discipline to stick with it. Emotional reactions to market swings — panic selling during downturns or overconfidence during rallies — are often the biggest threats to retirement security.
Fortunately, there are numerous strategies for protecting your assets during times of volatility. We can't promise there won't be ups and downs in the market. But what we can say with certainty is that with proper planning in advance, you can have a retirement plan that is designed specifically around your lifestyle goals, your risk tolerance, and will protect your retirement — no matter how the market is performing.
Schedule a meeting today to learn more about how we can design a retirement plan that protects you during market volatility.