How Should I Manage Market Volatility as I Approach Retirement?

As retirement nears, investors must shift from wealth accumulation to wealth preservation. Market volatility poses risks, making it essential to implement strategies that protect portfolios while maintaining long-term growth potential.

The Impact of Market Volatility

Market fluctuations are inevitable, but they are particularly concerning for retirees who rely on investments for income. Sequence-of-returns risk – the danger of experiencing market downturns early in retirement – can deplete savings faster.

For example, withdrawing from investments that have lost value locks in losses, reducing recovery potential. Developing a risk-mitigation strategy is crucial.

Adjusting Asset Allocation

One way to manage volatility is by adjusting asset allocation. While younger investors may prioritize growth, retirees should balance risk and stability.

A bucket strategy can help:

• Short-term bucket: Holds cash and short-term bonds to cover 2-3 years of expenses, providing liquidity during downturns.
• Intermediate-term bucket: Includes bonds and dividend-paying stocks for stable income.
• Long-term bucket: Contains growth-oriented investments, such as equities, to preserve purchasing power.

Diversification and Withdrawal Strategies

A well-diversified portfolio reduces exposure to market downturns. Investors should consider allocating assets across stocks, bonds, real estate, and possibly alternative investments to mitigate risk.

Adopting a safe withdrawal strategy, such as the 4% rule or dynamic withdrawal methods that adjust based on market conditions, helps prevent premature depletion of funds.

Additional Strategies

• Dividend Stocks and Bonds: Offer steady income regardless of market fluctuations.
• Tax-Loss Harvesting: Offsets taxable gains, reducing overall tax liabilities.