How should I deal with market volatility?
When you’re accumulating funds for retirement, your best strategy may simply be to try to ride out market volatility. However, if you’re close to or already in retirement, you may want to consider the following strategies to prepare for and deal with market volatility:
- Delaying retirement
- Reallocating your portfolio
- Building a cash reserve to cover 3-6 months of living expenses
- Tapping into your cash reserve
- Reducing spending
- Withdrawing less from your portfolio until when, and if, the markets recover
What should I do about required minimum distributions?
Required minimum distributions (RMDs) are withdrawals individuals must take from traditional, SEP & SIMPLE IRAs and employer-sponsored qualified retirement plans (QRPs), such as 401(k) 403(b) and governmental 457(b). Failure to take an RMD on time can result in an IRS 50% excise tax for every dollar under-distributed.
Prior to this year, most individuals had to start their RMDs at age 70½. However, the Setting Every Community Up For Retirement Enhancement (SECURE) Act signed in December 2019 raises the starting age to 72, which means individuals have until April 1 of the year following the year they turn age 72 to take their first RMD. This change does not affect individuals who turned 70½ on or before December 31, 2019.
In addition, the Coronavirus Aid, Relief, and Economic Security (CARES) Act waives 2020 RMDs from:
- IRAs, including inherited IRAs, and 2019 distributions taken in 2020, which had a required beginning date of April 1, 2020
- Certain defined contribution plans, including 401(k), 403(b), 457(b), and IRA-based plans
These changes provide additional time for individuals to potentially amass tax-deferred gains.
How much can I spend in retirement?
Obviously, the amount of income you’ll need in retirement depends largely on what you’ll spend each year. To estimate how much that will be, examine your essential and discretionary expenses and how they may evolve.
- Essential expenses are basic, ongoing expenses like food, mortgage or rent payments, transportation, insurance premiums, taxes, basic health care costs, and other nondiscretionary living expenses.
- Discretionary expenses include entertainment, travel, recreation, charitable giving, and luxury purchases. Because these are nonessential, you can potentially lower or postpone them during periods of market volatility or if your financial situation changes.
Use our retirement expense planning worksheet (PDF) to help plan your retirement expenses.
Where will my income come from?
Retirement income often comes from a variety of sources. Yours may include:
- Retirement savings, including 401(k), 403(b) and 457 plans
- Nonretirement savings, including brokerage accounts or savings accounts
- Social Security
- Traditional pension plans (defined benefit plans)
- Employment (full- or part-time)
How you receive income from these sources can affect your tax situation from year to year. Your strategy can also influence how long your savings can continue to meet your income needs.
Once you’ve estimated your expenses and income in retirement, see if there’s a gap between the two totals. If you don’t have enough money for your ideal retirement, consider modifying the amount you’re saving, your retirement goals, or both. A financial advisor may also be able to help reallocate your portfolio to generate more income, keeping in mind your time horizon and risk tolerance.
How much can I withdraw?
For a long time, it was thought if you have 60% of your investments in stocks and 40% in bonds, you should be able to withdraw about 4% of your savings in your first year of retirement. After that you would adjust that amount for inflation. However, the rule is considered outdated today.
Many advisors now prefer a more sophisticated approach that includes flexible withdrawals based on portfolio performance. They encourage careful planning to keep fixed expenses low so discretionary expenses can be trimmed if needed.
Should I tap my taxable or tax-deferred accounts first?
Consult your tax advisor before assuming withdrawals from taxable accounts are your best first step.
Conventional wisdom leans toward withdrawing funds from taxable accounts first. By starting with these accounts, your tax-deferred assets can continue to enjoy the potential to grow on a tax-advantaged basis. But that might not be the best approach for your situation. Consult your tax advisor before assuming withdrawals from taxable accounts are your best first step.
How can I help ensure I don’t outlive my savings?
To help protect against the risk of outliving your retirement savings, ensure that your essential expenses are covered by sources such as:
- Social Security
- Annuity payments
- Insurance benefits
By providing a fixed payment amount, these sources may help protect you from market volatility and lower your risk of outliving your money.
- Work with a financial advisor to determine strategies for dealing with market volatility prior to and in retirement.
- Take RMDs on time and the correct amount to avoid the costly excise tax.
- Use the retirement expense planning worksheet to help analyze your retirement expenses.
- Talk to your financial advisor and tax advisor about possible approaches to retirement income.
Wells Fargo Advisors does not provide tax or legal advice. Please consult with your tax and/or legal advisors before taking any action that may have tax and/or legal consequences.