You’ve spent a lifetime accumulating funds for a smooth retirement. You’ve thought ahead and assumed a decent yield for your investments, calculating exactly how much you’ll need to retire comfortably. What if your retirement years coincide with a down market?
Selling your investments at depressed prices creates a two-fold problem for retirees. When prices fall, you might have to sell more shares than expected to raise the same amount of cash. You also might be taking out money that could harm your retirement plans and interfere with your ability to ride out the next uptick.
Investment firm Charles Schwab has released new tips for retirees to solve this issue. Instead of selling low and possibly ruining your retirement, follow these seven steps to withdrawing funds in a down market and make sure you keep your plans on track.
A financial advisor could help you plan for retirement and help you select investments that align with your financial goals. Find a qualified advisor today.
Before Withdrawing, Try These Steps First
First, you should know how much you can spend annually assuming a 30-year retirement. The general rule is to withdraw 4% in your first year and then adjust your withdrawal rate afterward to account for inflation. However, if the stock market falls and your account value plummets, you may need to skip your inflation adjustment temporarily.
If that happens, Charles Schwab recommends reevaluating your monthly budget. You should ensure that your retirement withdrawals cover your essential expenses at the very least. These include expenses like food, housing, health care, insurance and taxes. If you can, you should consider reducing spending on eating out in restaurants and travel-at least until you can be reasonably sure that your retirement savings will cover 75% of your expected retirement expenses.
Another option for immediate funds would be evaluating your cash and annuity options. You should try to tap your cash savings before withdrawing from a retirement portfolio, since permanently withdrawing money from an investment portfolio can negatively impact your ability to generate more funds in the future. If you have cash savings, spend that first. Also consider switching your annuity from accumulation to payout if you can.
Be Strategic When Withdrawing
Sometimes it’s necessary to withdraw from your investment accounts no matter what. In that case, Charles Schwab recommends being strategic in your withdrawals.
Start With Interest and Dividends
Before selling your investments, try to only withdraw the interest and dividends from your taxable accounts. Leaving the original investment untouched allows you to potentially grow your income when the market recovers in the future.
Tap Principal From Bonds and CDs
Cash a maturing bond or tap the principal from a certificate of deposit (CD) next. You won’t owe any taxes on your original principal, so you will only have to pay income taxes on the interest.
Sell Lower-Volatility Investments
Another option would be to sell any short-term bonds or bond funds, since they’re generally not as affected by market volatility. Bond values are generally stable, so selling these in a down market can provide needed liquidity and not overtly harm your retirement savings.
Rebalance Your Portfolio
If recent market turbulence has left your investment portfolio out of alignment with your risk and asset allocation goals, now would be a good time to rebalance and raise needed cash. Sell assets that have risen in value and are now overrepresented in your portfolio, and buy assets that may have decreased in value.
Reduce Your Tax Bill
Lastly, it’s important to take advantage of the market downturn to maximize your tax savings. Use investment losses to reduce your tax bill, offsetting gains and reducing your tax liability through tax-loss harvesting. You can also minimize your taxes owed by selling investments that you’ve held longer than one year, since those gains are taxed at the long-term capital gains tax rate and not as ordinary income.
Retirees can still benefit from their investments even during a down market. Investment experts recommend reevaluating your retirement budget and tapping your cash savings before selling investments at low prices. If you need to, you should only withdraw interest and dividend values or sell more-stable investments to raise additional funds. Focus on maximizing your tax savings, and when the stock market improves, you’ll be positioned well for the future.
Retirement Planning Tips
- Not sure when to start withdrawing for your retirement or how much you’ll need? For a solid, long-term financial plan, consider speaking with a qualified financial advisor. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- Use SmartAsset’s free retirement calculator to get a good first estimate of how much money you’ll need to retire.
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