10.2.26 What Happens to Your Retirement Plan When the Market Falls 20%?

What Happens to Your Retirement Plan When the Market Falls 20%?

What would happen to your retirement plan if the stock market dropped 20% next month?

That may sound like a pretty simple question, but the answer can be very different depending on where you are in life.If you're 35 years old and contributing to your retirement plan every month, a 20% decline can be uncomfortable. But you have something very valuable on your side: time.If you're 65 or 70 and taking money from your portfolio to pay your living expenses, the situation is different.You're no longer just investing for the future. Your portfolio is helping fund your life today.

The problem with taking money out during a decline

Let's say you retire with $1 million and need $50,000 a year from your investments. Now imagine the market declines 20%. Your $1 million portfolio becomes approximately $800,000. But your need for $50,000 of income hasn't changed. You're now taking money from a smaller portfolio. This is one reason sequence-of-returns risk is so important during retirement. The returns you experience aren't the only issue.

When those returns occur can matter, too.

So what can a retiree do?

There isn't one answer that works for everyone. Some investors are comfortable remaining fully invested through market declines. Others may want a more diversified approach to managing risk. Some may maintain reserves for near-term spending. And some may use tactical investment strategies to adjust their exposure as market conditions change. At Benchmark Financial Design, we believe the investment strategy should be connected to the financial plan. We use tactical allocation as one component of our approach. The goal isn't to predict every market move. Nobody can consistently do that. Rather, we believe it is worthwhile to pay attention to changing market conditions and make adjustments when appropriate.

The question I would ask Instead of asking only:

"What return do I expect from my portfolio?"

I would also ask:

"What would a significant market decline do to my retirement plan?"

Could you continue taking the income you need?

Would you have to sell investments at an unfavorable time?

Would you change your investment strategy because of fear?

Would your retirement lifestyle have to change?

Those are important questions to answer before the next market decline.

A Smart Moment takeaway

Retirement investing isn't simply about maximizing returns. It's about creating a strategy that gives you a reasonable opportunity to accomplish your goals while understanding the risks that could get in the way. That's why we believe investment management and financial planning need to work together.

Investing involves risk, including possible loss of principal. Tactical strategies may underperform during periods when markets rise rapidly. No investment strategy can eliminate market risk or guarantee a particular outcome.