A Calm Way to Ride Out Market Swings in Retirement
A market decline can make the next portfolio withdrawal feel more consequential. The immediate question is often practical: will paying for the next few months require selling investments after their value has fallen?
A useful response begins before the next trade. The retirement plan can identify which dollars may be needed soon, which have more time, and what conditions would justify a change. That structure cannot prevent a loss. It can keep one difficult market week from becoming the only reason for a long-term decision.
Why do withdrawals change the effect of a market decline?
Two portfolios can experience the same set of returns and reach different outcomes when gains and losses occur in a different order while withdrawals are being taken. Losses early in retirement can be especially consequential because money is leaving while a smaller balance is trying to recover. This interaction between returns and withdrawals is known as sequence risk.[1]
The account balance alone does not answer the household question. The next withdrawal has a date and a purpose. Groceries due this month cannot wait through a long recovery. Money intended for later years may have more time, provided the rest of the plan can support that patience.
What job does the money need to do?
Some households make the timing of their needs easier to see through a bucketed approach. The labels can vary. The central idea is to connect the expected use of the money with the amount of fluctuation it may reasonably experience.[2]
How does time change the job of each dollar?
The same market decline creates different decisions across three spending horizons.
Expected use | Primary job | Question during a decline |
|---|---|---|
Soon | Fund known spending with limited dependence on a near-term recovery | Is the spending reserve adequate? |
Next | Balance future withdrawals with a moderate recovery period | Has the timing or amount of the need changed? |
Later | Support longer-term needs and purchasing power | Does the portfolio still match this longer job? |
The dividing lines are household decisions. Income sources and spending help determine where they belong. Taxes and portfolio structure matter too.
A near-term reserve may provide time before investments intended for later years need to be sold. The amount depends on expected income, essential spending, and discretionary choices. It also depends on the risk the broader plan can absorb. The reserve will eventually need a replenishment approach. Vanguard places volatility within a broader set of retirement risks, including spending and inflation. The set also includes health costs and longevity.[3]
Dovetail Principle: When Life Changes, the Plan Can Change Without Starting Over
Money intended for an upcoming withdrawal has a different job from money meant to support later years. Defining that job helps determine how much fluctuation each part of the portfolio can reasonably carry.
Should the withdrawal source change when markets fall?
Using cash can avoid selling a particular investment at a lower price. Temporarily reducing discretionary spending may preserve more of the reserve. Selling in a taxable account may create a capital gain or loss. A larger traditional IRA withdrawal may increase taxable income.
Income can also affect Medicare costs. Higher-income beneficiaries may pay an additional amount for Part B and prescription drug coverage.[4] The choice of account therefore belongs beside the spending need and tax picture. It should not be made from the investment return alone.
When does a portfolio change deserve consideration?
The portfolio should reflect when money may be needed and how much fluctuation the household plan can absorb. A change may deserve consideration when spending shifts, the reserve becomes inadequate, or the portfolio no longer matches its assigned purpose.
Selling because markets have already fallen creates a second decision about when to reinvest. Some of the market’s strongest days have historically occurred close to its weakest days. Missing a brief recovery can affect long-term results, although past market patterns cannot predict the next one.[5]
Frequent account checking can make short-term losses feel more immediate. Research on myopic loss aversion connects frequent evaluation with heightened sensitivity to losses.[6] A prewritten decision rule can help separate a market update from a change in the household facts.
That decision rule might ask whether near-term spending changed, whether the reserve remains adequate, and whether the portfolio still fits each dollar’s job. A meaningful change in those facts can prompt analysis and a recommendation. A noisy week by itself supplies less information.
What can you return to when prediction is impossible?
Market swings may reveal that part of the retirement plan is difficult to use. The next withdrawal source may be unclear. The reserve may have no replenishment rule. The portfolio may have an allocation without a stated connection to future spending.
Those are planning questions. They connect investment management to retirement income and taxes. Medicare and the life the money supports also belong in that planning. Dovetail’s approach to retirement investment management begins with that broader purpose.
A useful starting place is concrete: what must be funded soon, which dollars have time, and what change in the household facts would call for another decision? The plan still cannot predict the market. It can make the next action less dependent on trying to do so.
Related Reading: The Better Safety Question in Retirement: What Should Each Dollar Do?
