Retirees often need to take cash out of retirement accounts to handle basic household expenses on a regular basis. If you have to make withdrawals in a declining market, there are strategies you can use to minimize the damage to your long-term financial plan.

Consider these retirement withdrawal strategies for a down market:

1. Don’t panic.
2. Be financially cautious.
3. Try to leave money in the stock market.
4. Postpone withdrawals.
5. Have a strategic portfolio plan.
6. Make sure to allocate assets properly.

Should You Take Retirement Withdrawals During a Declining Market?

Most investment professionals advocate leaving money in a downward-trending stock market, primarily because weak markets have historically bounced back, and you don’t want to miss that rebound. There are several reasons to avoid pulling cash out of the market. Stock values are down, so you would likely be selling at a loss. Instead, you want to aim to buy low and sell high. You may also need to stay in the market to deal with inflation over the long term.

Should You Postpone Withdrawals While the Stock Market is Down?

Leaving cash in a weak stock market is usually the best move for younger investors who have time to recover. But retirees tend to use market withdrawals to generate cash flow and have less time for the market to rebound.

Retirees could consider alternative ways to generate cash without raiding their retirement accounts in tough market conditions. “In a perfect world, a retiree should try to postpone withdrawals, yet in the real world, retirees should consider alternative sources of wealth,” says Steve Parrish, an adjunct professor at The American College of Financial Services, who is based in St. Augustine, Florida. “Try to find assets uncorrelated to the market that you can utilize until the market normalizes.”

Retirement Distribution Strategies for a Declining Market

Taking retirement withdrawals out of a lagging stock market means a retiree is essentially selling low. Consider these strategies to minimize the damage to your long-term retirement portfolio.

Don’t panic. Avoid making any major changes to your portfolio while you are feeling panicked. “Staying in the market will allow the retiree investor to see the performance of an eventual market return,” says Brian Windsor, vice president at Bogart Wealth in McLean, Virginia. “In contrast, moving a large quantity of cash accepts the losses and then you have to find the right entry point to get back in, which is typically done when the market has already recovered.”

Be fiscally prudent. In a down stock market, it often makes sense to reduce household spending, which can keep you from taking too much cash out of a weak market. “First off, you have to be able to cover your essential, non-negotiable expenses like food, energy, and housing costs,” Windsor says. “However, if the majority of your investments are subject to market volatility, you may want to reconsider spending a larger amount of money on discretionary expenses like a new car, a big vacation, or dining out.”

Be strategic. You can divide your retirement portfolio into segments based on when you expect to need the funds.“Each time segment would have a specific goals-based sub-portfolio,” says Clark Richard, chief executive officer at Vineyard Global Advisors, in Englewood, Colorado.

For example, consider a retiree with a $3 million portfolio who seeks $100,000 in annual spendable income. The portfolio could be divided into three segments that are invested differently:

• The liquid portfolio. The liquid portfolio addresses retirement income needs over a one- to three-year time frame. “These funds would be held in cash or other instruments that would provide principal protection,” Richard says. “In this example, $300,000 would be invested in this portfolio.”
• The mezzanine portfolio. The mezzanine portfolio would address the needs over a four- to seven-year time frame. “In this example, let’s assume a government bond could be purchased that matures each year prior to when the funds are needed,” Richard says. “This portfolio would be funded with $322,696 of overall retirement savings.”
• The legacy portfolio. The remaining $2,377,304 of overall retirement savings would fund the legacy portfolio. “This portfolio may now fluctuate unencumbered by cashflow constraints for seven years,” Richard says.

Is There a Retirement Withdrawal Strategy to Minimize Losses?

While most of the stock market has experienced losses in 2022, retirement investors may see some bright spots in their portfolios. “To mitigate any damage, retirees should get more specific on what they sell for cash flow each month and pay attention to what portfolio components are doing well and what aren’t doing well,” Windsor says.

Make Sure Your Assets Are Properly Diversified

Diversifying your investments can help protect you from stock market downturns. “That plan includes making sure that their portfolio is allocated correctly before the market enters a decline,” says Matt Wilson, chief investment officer at Keen Wealth Advisors, in Overland Park, Kansas. “We also make sure that each client that is withdrawing funds has a portion of their portfolio set aside in short-term fixed income and cash. The dividends and interest are used to supplement someone’s withdrawals.”

It’s important to keep enough cash outside the stock market to satisfy income needs in retirement for several years. “We keep a portion of someone’s needs in short-term fixed income and cash to supplement their income needs in a declining market. That way they’re not forced to sell stocks when they are down,” Wilson says. “When the market is up, which is the case most years, we’ll sell a portion of the stocks that are up to supplement their income needs.”