A stock market downturn can cause a significant problem in early retirement, but wealth management expert D. Paterson Cope has some tips for retirees.
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Downturns in the stock market can actually be beneficial to some investors, as it allows them to purchase shares at lower prices. However, as wealth management expert D. Paterson Cope explains, the exact opposite could be true for those who find themselves in early retirement.
During downturns in the stock market, those who are withdrawing funds from their retirement accounts may be taking out more from their portfolio than can be replenished through gains.
For those who are early on in retirement, stock market downturns like the one the U.S. is currently experiencing could completely throw off the plan they worked so many years to build.
The problem for early retirees is the funds they are withdrawing from their accounts is a set dollar amount, not a set number of shares. When those withdrawals occur during a stock market downturn, it takes requires them to sell more shares to meet that set dollar amount than it would during a strong market.
If the downturn is significant enough, or if the rebound takes longer than expected, it could dramatically affect the sustainability of the retirement plan over time. This poses the greatest risk for people who are in early retirement, says D. Paterson Cope, simply because of the number of years they may be relying on this retirement plan.
Those in early retirement do have some tools at their disposal to combat some of this risk. The most straightforward action they can take is to reduce their expenses and rein in the spending.
This could include cancelling or delaying a planned vacation or improvements to a home. Doing this will allow them to withdrawal less from their retirement accounts, thereby giving those accounts the chance to regain the losses over time.
Another option is to adjust the portfolio holdings once the performance begins to suffer. D. Paterson Cope says those who are concerned about the effects of a stock market downturn could opt to shift investments from stocks to bonds, for example, and then shift some of that back to stocks as the market rebounds.
A final option could be relying on assets not in a retirement account to fund expenses while waiting out the stock market. If one has cash savings, they could rely on that more in the short term and reduce the amount they withdrawal from retirement accounts.
If they have the option, they could opt to delay withdrawals from retirement accounts altogether. Or, if they’ve reached an age where they need to take required minimum distributions, they could only take that RMD level from their retirement account and use those other assets to make up the difference.
While a stock market downturn is hardly ever a positive thing for people in early retirement, D. Paterson Cope says there are things investors can do to combat the effects and sustain their retirement plan.
About D. Paterson Cope
D. Paterson Cope, CFP® is the founder and CEO of Cope Private Wealth, a financial planning and wealth management firm specializing in assisting retirees and people who are about to retire. D. Paterson Cope has been providing financial advice for more than 30 years. He first earned the designation of Certified Financial Planner (CFP) in 1997. When he isn’t working, he enjoys spending time with his wife, Jennifer Miree Cope, and the rest of his family in Mountain Brook.
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