If you’re retired, you may have nervously watched the stock market’s slide this week.
Sure, it appears to be climbing again. But if the market tanks once more and stays there for a while, what will that mean for your nest egg and cash flow?
“This is something that is coming up more and more lately,” said certified financial planner Matt Stephens, a financial advisor with AdvicePoint in Wilmington, North Carolina.
While stocks have spent the year generally climbing higher, a confluence of factors is now rattling the markets.
Among the concerns: Treasury Secretary Janet Yellen said Tuesday that Congress needs to raise or suspend the debt ceiling by Oct. 18 or the U.S. will default on its debt. Additionally, Federal Reserve Chairman Jerome Powell told lawmakers that the rate of inflation may remain elevated for longer than originally thought, which could mean interest rates start rising soon than anticipated.
The major stock indexes dropped on Tuesday, with the Dow Jones industrial average shedding 1.63% to close at 34,299.99. The S&P 500 index lost 2.04%, finishing the day at 4,352.63. The Nasdaq composite index fell 2.83%, closing at 14,546.68.
When stocks will turn downward again is impossible to know. And for retirees whose savings help fund their cash flow, any big drop can be disconcerting.
Keep in mind, however, this week’s pullback is on the heels of double-digit returns over the last 12 months: The S&P is up about 30%, the Dow Jones has gained 25% and the Nasdaq has climbed more than 31%.
When Stephens’ retired clients express concern about what might be ahead, he said he starts by reminding them that they will likely still need money in 20 years or 30 years, which is why part of their portfolio is invested in the stock market so their money can grow and outpace inflation.
“But they also will need money next month, next year and five years from now,” Stephens said. “Their stock investments may fall in value during this time, so we hold a certain number of years’ worth of retirement spending in bonds and other fixed-income investments.”
Most of his retired clients have six to eight years’ worth of spending outside the stock market, he said.
At a minimum, retirees should have enough in less volatile investments to get through a 12-month stock market drop, said CFP Ryan Marshall, a partner at Ela Financial Group in Wyckoff, New Jersey.
“This is like an emergency savings account, but for retirees it needs to last longer,” Marshall said.
Also, depending on the specifics of your stock holdings, it may make sense to sell some winners while they’re up.
“Taking some gains now from your equity allocation while the markets are up is a great way to build [your] liquid position without dramatically sacrificing performance,” said CFP Jamie Ebersole, founder and CEO of Ebersole Financial in Wellesley Hills, Massachusetts.
Additionally, if you have satisfied your required minimum distributions in the past by tapping the stock side of your portfolio, a sustained down market could mean rethinking that strategy. RMDs are amounts that must be withdrawn annually from qualified retirement accounts once you reach age 72.
“If it’s a down year, we would most likely use the cash or bond portfolio to fund the RMD for that particular year,” Marshall said. “This way we don’t need to sell an equity position in the year the market is down.”
