The Long-Term Implications of Retiring in a Down Market

Retiring in a down market could have long-term effects on your retirement portfolio and overall financial well-being. A down market refers to a period when asset prices decrease. It can happen for various reasons, such as economic recessions, geopolitical tensions, and pandemics. While retiring in a down market can be challenging, there are steps you can take to help counter the effects and protect your retirement savings.

Potential Problems of Retiring When Markets Have Dropped

Retiring when your portfolio is down in value can be harmful due to what’s called sequence-of-returns risk. This risk is a significant concern for retirees or those close to retirement who are withdrawing money from their investment portfolios to cover their living expenses.

Sequence risk refers to the order in which investment returns occur. As this Forbes describes it: “Sequence of return risk is the risk that market declines in the early years of retirement, paired with ongoing withdrawals, could significantly reduce the longevity of the portfolio.”

If you start taking distributions during a down market, you may need to withdraw a greater percentage of your portfolio to maintain your standard of living. This can deplete your portfolio faster and hurt its sustainability.

Retiring in a down market can also have emotional implications, as market losses can cause stress. You may be more likely to make emotional decisions about your investments, such as selling them in an attempt to cut your losses or avoiding investing altogether.

Steps to Help Prepare for Down Markets

To help counter the effects of retiring in a down market, you may need to reassess your risk tolerance and adjust your investment portfolio accordingly. For instance, you might consider reducing your exposure to stocks and increasing your exposure to fixed-income investments such as bonds. Fixed-income investments can help provide a steady stream of retirement income while protecting your principal investment from market volatility.

Additionally, you will want to make sure that you have appropriately diversified your investment portfolio across different asset classes, sectors, and regions. Diversification helps spread your risk and minimize the impact of any one investment on your overall portfolio.

When markets drop, you may want to consider adjusting your withdrawal rate. In addition, consider having cash on hand so you can avoid selling securities at a loss. If possible, consider delaying retirement. Even part-time work can help you avoid withdrawing from your portfolio. Reducing your expenses can also help. For example, you might postpone a vacation until the markets and your portfolio have bounced back.

Finally, you might consider working with a fiduciary, fee-only financial advisor. A fiduciary financial advisor is legally obligated to act in your best interest, meaning that they must provide advice based on your financial needs and goals. A fee-only financial advisor charges clients a fee for their services, and they do not earn commissions or bonuses for recommending certain investment products or services.

Working with a fiduciary, fee-only financial advisor can help you make informed decisions about how to protect your retirement savings.

Final Thoughts

Retiring in a down market can have significant long-term implications on your retirement portfolio and financial well-being. However, there are steps you can take to help counter the effects and protect your retirement savings.

Working with a fiduciary, fee-only financial advisor can help you make informed investment decisions, reassess your risk tolerance, and develop a withdrawal strategy that takes into account your retirement goals and needs. By taking these steps, you may feel more confident that your retirement savings can last throughout your retirement years, regardless of market conditions.

Schedule a complimentary, 15-minute chat with a fee-only, fiduciary financial advisor today to discuss your personal situation.

This material was generated using artificial intelligence (ChatGPT) and edited by Kaleido Inc. from information derived from sources believed to be accurate. This information should not be construed as investment, tax, or legal advice.

Parkshore Wealth Management is a family-owned, independent, fee-only Registered Investment Advisor with offices in Roseville and Folsom, CA, and Lehi and Logan, UT. We partner with financially responsible individuals and families who are eager to take positive steps that will allow them to use their money to build the life they desire. The firm is led by Harold Anderson, CFP®, and Daniel Andersen, CFP®, both members of NAPFA, the country’s leading professional association of fee-only financial advisors.