Key Points
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A stock market crash early in retirement could put you at risk of depleting your nest egg.
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It’s important to pivot in that situation rather than stick to a rigid withdrawal strategy.
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Having cash reserves on hand could also help preserve your savings.
For many retirees, the biggest fear isn’t a health event — it’s the possibility of outliving their money. And if you make a habit of dipping into your retirement savings at random instead of having a strategy, you could end up with $0 to your name with plenty of years left on the planet.
For this reason, financial experts strongly encourage savers to come up with a strategic withdrawal rate based on their asset allocation, income needs, and retirement timeline.
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But even if you come up with a withdrawal rate that works in theory, in practice, you’re not guaranteed to never run out of funds. There’s one mistake retirees make all too often that could put their savings at risk. And it’s a misstep you’ll want to avoid.
The early withdrawal mistake that could drain your portfolio
One of the most damaging behaviors retirees engage in is withdrawing a fixed dollar amount from their portfolios regardless of market conditions. While the consistency of sticking to that fixed amount may feel safe, it can create unintended consequences during periods of market volatility.
Let’s say the market dips early on in your retirement. If you’re forced to sell investments when they’re down to generate income, you’ll have fewer assets left in your portfolio for when the market recovers. Over time, this risk, known as sequence-of-returns risk, could put you at risk of eventually ending up with no money left at all.
Of course, you can’t control what the market does and when it crashes. But what you can control is your own response and behavior.
Be flexible with spending and have plenty of cash reserves
Anytime the stock market takes a dive, it’s a good idea to scale back on portfolio withdrawals as much as you can. But it’s especially important to do so if a market downturn occurs early on in retirement.
To that end, being flexible with your spending could spell the difference between running out of money down the line or not. If you’re willing to rethink discretionary purchases and put off certain plans, you could help your portfolio recover from market crashes and set it up to benefit from future gains.
Another key thing to do is maintain plenty of cash reserves. You may want to go as far as to have three years’ worth of living expenses in cash, including money for the things you want to do, like travel. If you have a three-year cash cushion, you won’t necessarily have to reduce spending drastically if there’s a negative market event.
It’s a good idea to establish a safe withdrawal amount for your IRA or 401(k). But there’s more to the story than that. Being flexible and protecting yourself with cash could go just as far in preserving your savings and making sure that money is there as long as you need it.
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