How you deal with this could determine how you spend the rest of your retirement.
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Even if your investments are going well, retirement can be stressful. Volatile markets can turn low-level background anxiety into a recipe for sleepless nights. You’re worried that your savings will be gone quickly, but you’ll also need to sell your investments to pay your bills.
How well you handle these situations, especially in the early stages of retirement, depends largely on your retirement strategy. There is no best option, but there is one mistake that is almost guaranteed to cost you.
flexibility is key
There’s no need to create a rigid retirement withdrawal strategy when market volatility becomes an issue. You need a plan that allows you to adapt to your circumstances and grow your savings over the rest of your life.
Sticking to a strict schedule may feel effortless at the moment. But if you strictly follow the 4% rule, for example, you could end up withdrawing more money than is prudent while your investments are down. This can leave you with less money to invest to cover future expenses, and you could run out of money quickly.
When your investments are down, you may want to cut back on your spending some. For example, you might only withdraw 3% or 3.5% for a while instead of 4%. Once your investment recovers, you can increase your withdrawal rate again if that’s what’s best for you.
Also consider using a bucket strategy
A bucket strategy for saving for retirement involves investing your money in different ways over different time periods. Funds that you don’t plan to use for more than 10 years remain invested, so they can continue to grow until you need them.
Any savings you plan to spend within the next three to 10 years should go into low-risk investments, such as certificates of deposit (CDs) or money market accounts. This way, your money will still grow little by little, but you will not be at risk of big losses.
The money you plan to spend over the next year or two remains in flux. A high-yield savings account is a good option for this. This will give you access to your money. It also gives you some flexibility in when to sell your investments.
If your investments are down, but you already have a year or two worth of cash saved, you can afford to wait a bit for your investments to recover before selling your stocks. That may be just what you need to ease your worries about covering costs in the short term.
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