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How Retirees Can Better Protect Their Wealth In A Market Downturn

Market downturns mean different things throughout your life. 

Early and mid-career professionals may look at it like a major blow-out market sale, where they can snag valuable stocks at reasonable prices. With a long time horizon, their assets have plenty of time to recover before needing them in retirement. 

But as someone who is about to retire or has already made the plunge, market downturns take on a whole new definition. The investments that are losing value are partly what’s funding your lifestyle, making people in this category far more anxious when volatility takes over.

Today, investors are facing an onslaught of obstacles, from dropping stocks, to record-high inflation, to dwindling morale. And with recession dialogue gaining traction, how can retirees strategically insulate their wealth through this (and any future) market downturns? 

Understand All The Risks

Have you ever been in a conversation where someone asks if you’d like to hear the good or bad news first? Many people start with the bad news so that they can end with the good—we’re going to mirror that sentiment, so hang on for just a moment. 

Stock market downturns are particularly tough for new retirees. The two prevailing reasons “why” are:

  • Since stock prices are down, you’ll have to sell more to reach your planned withdrawal amount. In this case, stocks are down, but outflows still occur, decreasing your nest egg further.
  • A dwindling nest egg early on makes it more difficult for the portfolio to rebound to projected rates. 

While that may have felt like a double gut punch, don’t worry; it’s not the end of the story. At Step by Step, we help you create a deliberate investment strategy that accounts for market downturns throughout retirement. Why? Because market downturns/corrections are far more common than you might realize. 

Research indicates that we can expect a market correction (a change of about 10%) as often as once per year, and even more, significant downturns of 20% or more happen a little over every six years. If you plan to be retired for 20+ years, you’ll likely experience several market cycles. 

We help ensure you’re prepared for every one of them—the good, the bad, and everything in between. So, where should you start?

Use Savings Buckets To Build A Sustainable Retirement Income Plan

You’ve spent decades saving money and building a comfortable nest egg to support your ideal retirement lifestyle. But how do you turn that nest egg—full of several accounts and investments—into a reliable income stream?

A core strategy we use at Step by Step is the bucket strategy

The bucket strategy segments your wealth into different categories that you can draw from at various points in your retirement journey. The categories have two defining characteristics: time and risk. Let’s take a closer look. 

Bucket #1: The “Guarantee Please” Income

The first bucket centers on guaranteed income that doesn’t rely on market returns, including:

  • Pension 
  • Social Security
  • Annuities
  • Cash

The primary purpose of this bucket is to protect your wealth and offer support when needed. Think of it like the “just in case” stream of income because its goals are to minimize risk and provide a cash cushion. 

You should work to have enough in this bucket to supplement the losses from a market downturn. So if your investments don’t perform as you want, you can withdraw extra from this bucket and replenish it when your investments rebound.  

Bucket #2: The Middle of The Road

As you prepared for retirement, your allocations may have heavily favored equities, which makes sense. Investing primarily in stocks gives your portfolio the best chance for growth.

But as you near or enter retirement, your allocation requirements change. You don’t need 90% of your portfolio in risky equities. Instead, you need a balance between safe, moderate, and riskier investments to sustain your nest egg long-term. 

The second bucket, about 10-15 years into retirement, is all about cultivating moderate risk securities, including:

  • Bonds, like fixed maturity bonds
  • Dividend-paying stocks
  • Real estate investment trusts (REITs)

Since these investments are positioned to keep pace (and ideally beat) inflation, most of your nest egg will likely live here. 

The goal is to take on a medium amount of risk and grow your nest egg without suffering massive losses due to market conditions. 

Bucket #3: The Long-Term Plan

It’s not uncommon to spend two to three decades in retirement. As such, it’s critical to have a portion of your nest egg siphoned for long-term growth planning. 

If your portfolio needs to last 25+ years, you’ll have to invest in riskier, growth-minded equities. With the support of the other two buckets, you can take on more risk to boost the value of your nest egg long-term.

So what should you invest in? You want to build a diversified portfolio with exposure in the U.S and foreign markets, large-cap and small-cap stocks, various industries/market sectors, etc. All the standard investment rules apply. We’ll use your risk tolerance, time horizon, lifestyle goals, income channels, and more to help you curate this bucket. 

The third bucket serves two distinct purposes:

  • Increase the value of your nest egg
  • Help replenish the other buckets when needed

While this bucket will likely experience more volatility, it also has the most time to reap rewards long-term. Depending on your growth goals, you may also be able to use this bucket to help you leave a legacy, like giving to charity, leaving your children an inheritance, etc. 

Maintain A Healthy Emergency Fund

Yes, retirees still need emergency savings!

While you may think your need for extra cash is long-gone, retaining an emergency fund can be instrumental in helping you weather market storms. Instead of drawing from your investments to cover living expenses, you could turn to this account. 

The average length of a bear market is just over 9 months, so it might be best to aim for 10-12 months of living expenses in your emergency savings. Once your investments start doing better, you can look to replenish the account. 

As always, it’s often best to store emergency funds in a liquid, accessible account like a high-yield savings or money market account. 

Create A Proactive Tax Plan

Proactive tax planning can significantly benefit your retirement income plan. How? Through strategic action, you can keep more of your money working for you and less going to the government.

At Step by Step, we’re passionate about helping you build a forward-looking tax plan that ultimately saves you money in the long term. Depending on your income needs and goals, there are many strategies to consider, but here’s a snapshot. 

  • Tax loss harvesting. Here, we sell underperforming stocks to offset gains from other profitable stocks or other income. This balance helps keep your tax bill at bay and your allocations in order.
  • Roth conversions. Roth conversions can be handy for early retirees (before you start taking RMDs). Market downturns also present more opportunities to use Roth conversions to give you more tax-free income. This strategy can be complex, so let’s talk about it together to see if it makes sense for you. 
  • Retirement withdrawal strategy. We help you create a plan that optimizes your retirement cash flow. It’s a process that examines which accounts you should withdraw from and how much money you take out. Here, the more tax diversity, the better—a mix of tax-free, taxable, and tax-deferred accounts can bring more options and creativity.
  • Charitable giving. There are many ways retirees can give tax-efficiently (bunching, donor-advised funds, etc.), but perhaps one of the most lucrative is a qualified charitable distribution (QCD). A QCD enables you to give up to $100,000 from a traditional IRA to a qualified charity. 

When done correctly, tax planning can help you extend your nest egg's longevity, making it exceptionally viable during market volatility.

Finding Insulation In Instability

Market downturns come with various emotions. It’s unsettling to watch the market decline, primarily if you rely on the returns to supplement your lifestyle. 

But remember, we help you construct a fortified portfolio to withstand any market movement. 

We want to help you be the wise person who builds their house on rock—steady, constant, and firm—not on sand. A great way to do that is to divide your income into three distinct buckets. The bucket strategy helps ensure you have the income you need in the short term while still giving your investments room to grow long-term.

How can the retirement bucket strategy give your income more stability, even in a down market? Let’s talk more about your unique situation together. Set up an appointment with us today.