A Calm Way to Ride Out Market Swings in Retirement
A market decline can make the next portfolio withdrawal feel more consequential. You may wonder whether paying for the next few months will require selling investments after their value has fallen.
A useful response begins before the next trade. Your retirement plan can identify which dollars you may need soon, which have more time, and what conditions would justify a change. That structure can’t 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 withdrawals leave less money invested for a potential recovery. This interaction between returns and withdrawals is known as sequence risk.[1]
Your account balance alone doesn’t tell you how to cover your household’s spending. The next withdrawal has a date and a purpose. You can’t put off buying this month’s groceries while you wait for the market to recover. 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 fit these longer-term needs? |
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. You’ll eventually need a plan for replenishing the reserve. Vanguard places volatility within a broader set of retirement risks, including spending, inflation, 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] Choosing which account to draw from therefore requires considering your spending needs and taxes, not investment returns 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 decision rule written in advance can help distinguish a market update from a change in your household’s circumstances.
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. You may have no rule for replenishing the reserve. 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.
Start with the practical questions: what needs funding soon, which dollars have time, and what change in your household’s circumstances would call for another decision? The plan still can’t 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?
