Retirees Say This Drawdown Mistake Can Turn a Bad Market Into a Bigger Problem
Panic-selling is a classic move, and it’s one of the most expensive. Retirees are especially exposed because they can’t wait out a slump the way a 35-year-old can.
The average baby boomer has a 401(k) balance of $260,300 and an IRA balance of $286,700, according to Fidelity. While a grand total of $547,000 in retirement savings might sound like a lot, it can go fast if managed improperly.
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According to a Reddit thread, at least some retirees are looking ahead and creating a plan to avoid selling stocks in a downturn, by building cash or fixed-income safeguards. While this plan might not be perfect, it provides a much-needed peace of mind that helps them sleep at night.
The Sell-Low Trap
Worrying that the market will tank right after you stop working is common enough to have a name. Skee Orr, a certified financial planner (CFP) and founder of Kinetic Wealth, calls it sequence of return risk.
He said that two retirees can earn the same average return over a 20-year period, but end up in very different financial situations, depending on when a bad market hits.
“If a steep market decline hits early in retirement, while you are drawing money out to pay for living expenses, you may be forced to sell more shares at lower prices just to cover the basics,” said Orr. “That action locks in losses and leaves fewer shares to recover when the market eventually bounces back.”
In this case, the math works against you in ways it doesn’t in other years, he said.
Build a Cash Cushion
To combat this, Orr said many proactive investors build a financial cushion — i.e., cash or more stable, lower-volatility assets — to draw from instead of stock investments, in the event the market goes through a rough stretch.
“This approach is more about peace of mind and staying power than theoretical perfection,” he said. “If you can cover two or three years of living expenses using lower-risk resources without selling stocks, a down market becomes something you can wait out, rather than something that forces your hand.”
Pitch a Bond Tent Before You Retire
Using a bond tent — gradually shifting a portion of a portfolio into bonds or other fixed-income assets — three to seven years before retirement is one practical approach Orr said some investors take.
“Think of it like filling a water tank before a dry season,” he said. “It’s not out of panic, but preparation.”
After settling into retirement and giving your portfolio time to weather early storms, he said you can opt to slowly shift the bond allocation back into stocks.
TIPS Ladders for Predictable Income
If you want something more specific, Sean Lovison, CFP and founder of Purpose Built, recommended a customized TIPS ladder, which is a series of Treasury Inflation-Protected Securities.
This strategy doesn’t rival a bond tent. It's a way to carry one out.
“When a retiree knows that every dollar of their baseline living expenses is locked in, guaranteed and inflation-protected, anxiety is reduced and they know they can comfortably leave the rest of their equity portfolio alone to recover during market dips,” he said.
The Trade-Off
Mathematically speaking, holding a multi-year, fixed-income cushion might be slightly less lucrative than a heavier stock allocation, he said.
“But in practice, a strategy that gives you total peace of mind beats a mathematically 'perfect' portfolio that causes you to panic every time the market drops,” he said. “In the real-world, with real people, behavioral comfort is the foundation of a successful drawdown plan — not a theoretical spreadsheet.”
You’ll likely leave some upside on the table with this approach. In exchange, you get a portfolio you won’t bail on at the first scary headline and a retirement that’s less dependent on perfect timing.
This article was provided by MoneyLion.com for informational purposes only and should not be construed as financial, legal or tax advice.
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