Managing Withdrawals When the Market’s Down


If you’re retired and living off your investments, market downturns like the one we’re experiencing right now can cause you to question your retirement strategy. While we all know that markets are risky and expect them to go up and down over the course of retirement, experiencing a downturn firsthand is no fun. But do you need to adjust your retirement withdrawals when the market’s down? Let’s think through the best way to approach this question.

Mental Mapping: The Bucket Approach

Naturally, you don’t want to sell any of your investments while they’re down. The entire idea is to buy low and sell high, right? Well, if the market’s down and you need cash for your living expenses, what do you do?

A while back, I wrote a blog post about the “bucket strategy” approach to managing your investments. While I don’t believe it’s the best way to implement an investment strategy, it is a fantastic way to think about how they’re structured.

In that post, I mentioned that the first two buckets, cash and bonds, were your retirement “war chest”. These stable and relatively safe assets are there for you to access should you need to make withdrawals while the market’s down. Accessing your funds from this portion of the portfolio allows you to let your growth assets ride without selling them at a discount.

How Big Should Your War Chest Be?

When constructing your retirement portfolio, the first question tends to be the mix of stocks and bonds. How big does your war chest of cash and bonds need to be? Of course, it all depends on your retirement cash flows and risk appetite.

I think it’s helpful to couch this question in terms of a number of years’ worth of withdrawals. For example, if you plan to withdraw $50,000 per year from your portfolio, four years’ worth of withdrawals would be $200,000. If these funds were in a tax-deferred account such as an IRA, you’d need to gross up for taxes.

It took four years for the S&P 500 to recover from the Great Financial Crisis, so four years’ worth of withdrawals might be a good starting point. For retirees, a good starting point for the cash portion is one year’s worth of withdrawals. That leaves three years’ worth of withdrawals in bonds to build out a four-year war chest.

Of course, four years may not be enough for you. All these conversations need to happen with your financial advisor in the context of your risk tolerance and what’s needed in your financial plan. Remember, the war chest idea is simply a convenient way to think about your investments, not the best method of implementation.

What About One-Time Withdrawals?

Postponing withdrawals for one-time expenses may provide an opportunity to take some stress off your retirement portfolio when the market’s down. For instance, if you were planning to replace a car, maybe you can defer that purchase another year, assuming you’re not already going to Pep Boys every month to buy another quart of motor oil.

Other one-time expenses are a bit more difficult to postpone. When it comes to necessary home repair items such as replacing a roof, painting the exterior, or replacing the air conditioning unit, delaying may only make things worse in the future. Here in the Peach State, the a/c unit always dies in July when we still have months of broiling heat left to endure.

For one-time expenses, it’s best to use your judgment; they can be unpredictable and hard to account for in your financial plan. If you can defer those portfolio withdrawals, that’s fantastic. However, postponing necessary items may only compound the issue later.

Withdrawals When the Market’s Down

If you’ve planned all your retirement cash flows (both in and out) and created a year-by-year retirement tax plan, you shouldn’t feel too nervous about making retirement withdrawals while the market’s down. All good financial plans will account for years with negative returns – they’re more common than we’ve experienced over the last decade.

I recommend re-running your plan with updated numbers to see if the downturn has materially affected your retirement. You may find that your probability of retirement success only changes marginally. However, if you haven’t created a year-by-year cash flow and tax simulation as part of your financial plan, now’s the time. Talk to a fee-only financial planner ASAP to look at your financial position from different perspectives.

If you need help with ensuring your portfolio withdrawals are sustainable, then click here to set up a quick, complimentary introduction call to see if Prana Wealth is a good fit. We do still have the capacity to take on new clients.

As a fee-only financial advisor in Atlanta, we can (and do) work virtually with clients all across the U.S. and we’re here to help you when you’re ready.

The information contained herein is intended to be used for educational purposes only and is not exhaustive. Diversification and/or any strategy that may be discussed does not guarantee against investment losses but is intended to help manage risk and return. If applicable, historical discussions and/or opinions are not predictive of future events. The content is presented in good faith and has been drawn from sources believed to be reliable. The content is not intended to be legal, tax, or financial advice. Please consult a legal, tax, or financial professional for information specific to your individual situation.
ipad free ebook: How to Retire Checklist
Retirement help delivered to your inbox
Subscribe to our monthly newsletter and get your copy of our free ebook: The ‘How to Retire’ Checklist