Saving for retirement might seem like a tough thing — until you get to retirement and realize you need to somehow stretch that money over 20 or 30 years. Suddenly, you’ve got a new challenge on your hands — making sure the retirement savings you worked so hard to build don’t run out on you.
To that end, you’ll often hear that you need a solid withdrawal strategy. That could mean following the famous 4% rule or taking another approach.
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But sticking to a fixed withdrawal rate throughout retirement could actually put your savings at risk. And there’s one key thing you should aim to do to avoid that fate.
Pay attention to market conditions and adjust
When the market is performing well, sticking to the withdrawal rate you’ve landed on may be a perfectly reasonable thing to do, provided that rate isn’t overly aggressive. For example, if you decide to follow the 4% rule and take 4% of your savings out during strong or even flat market years, you shouldn’t be putting your nest egg at too much risk of running out of money.
It’s when you tap your portfolio as usual when the market is down that’s much more of a problem. And if you don’t lower your spending during market declines, you could end up with a big problem on your hands down the line.
Let’s say your portfolio loses 20% of its value during a market crash, but you keep withdrawing the same amount you did when the market was up. In that situation, you’re typically selling investments at lower prices to generate the retirement income you want.
But if you reduce your spending, you can leave more of your investments in your portfolio, giving them an opportunity to recover. Over time, that could spell the difference between your nest egg lasting as long as it needs to or running out eventually.
Your flexibility matters
Sticking with fixed portfolio withdrawals might seem like the easiest way to do things. And the upside is that in theory, it gives you steady, predictable income — that is, until your money runs out.
But the “running out” part is a problem. So instead of doing that, you may want to take a more flexible approach.
That could mean cutting a good chunk of discretionary spending during down markets or reducing spending slightly during years of weak returns. Even making modest adjustments to your spending could make a huge difference over the course of a decades-long retirement.
Of course, another smart thing to do is maintain a cash cushion. If you have enough money in cash to cover one to three years’ worth of expenses, you’ll have that much more leeway to leave your investments untouched during a market downturn.
But all told, the more willing you are to adapt to sub-optimal market conditions, the more you can protect your savings over the long term. So it’s worth tracking market conditions and your portfolio in retirement and making spending tweaks as needed.
