Key Takeaways for Handling Market Volatility in Retirement

In today’s uncertain economic climate, it’s no surprise that retirement plan sponsors are concerned about how retirees and those nearing retirement will handle market volatility. A recent survey by MetLife revealed that a majority of defined contribution plan sponsors are worried about participants’ abilities to weather market fluctuations, with nearly 70% expressing concern for those within 10 years of retirement and 61% for those already retired.

Market volatility can have a significant impact on retirement savings, but panic-selling during turbulent times is not the answer. According to Rob Williams, Managing Director of Financial Planning at Charles Schwab, selling off investments in a panic could mean missing out on potential gains once the market rebounds. Instead, retirees can minimize the risk of volatility by having a cushion of savings in cash, cash-equivalents, and short-term investments.

Experts recommend that retirees have between three to five years’ worth of living expenses in readily accessible funds to avoid a panic sell-off. This aligns with historical market behavior, as it typically takes around three and a half years for the stock market to recover after a downturn. Taylor Schulte, a Certified Financial Planner, suggests having a “war chest” of cash and bonds to cover living expenses for a period ranging from two to five years, depending on the client’s risk tolerance.

For retirees, setting aside a year’s worth of expenses in cash or cash-equivalents for immediate needs, along with 2 to 4 years’ worth of expenses in short-term investments, can provide a buffer against market volatility. However, for those who are not yet retired, time is on their side. Williams notes that the risk of a sudden market drop is less significant for younger individuals, who can benefit from buying into the market at lower prices during downturns.

In the event of an emergency, retirees without short-term savings may need to tap into their investment accounts. Williams recommends withdrawing interest or dividend income first, while Schulte suggests reinvesting dividends whenever possible and gradually building up cash reserves over time. Both experts emphasize the importance of periodically rebalancing portfolios to align with financial goals and adjust asset allocations based on market conditions.

Ultimately, staying calm and having a well-thought-out financial plan can help retirees navigate market volatility and stay on track to meet their retirement goals. By maintaining a cushion of savings, avoiding panic-selling, and periodically reassessing their investment strategy, retirees can weather market fluctuations with confidence and peace of mind.