Retirees face unique risks during stock market downturns because they cannot rely on a steady paycheck and must continue withdrawing money for living expenses. A market correction early in retirement can force retirees to sell investments at losses to cover costs, leaving them with less to recover when markets bounce back.
The article recommends running a "fire drill" to test your ability to handle a downturn before it happens. Start by reviewing how your portfolio is allocated across stocks, bonds, cash and other assets. Then imagine a hypothetical 20% or 30% drop in stocks and assess how your withdrawal strategy would change.
During this exercise, consider whether you have enough cash to cover monthly living expenses without selling investments. Social Security, pensions, or other income sources can reduce your reliance on portfolio withdrawals. Also check if you hold too much in a single stock or industry, which could magnify losses.
To prepare, many financial advisors recommend keeping one to two years of expenses in cash reserves. Use fixed-income assets for shorter-term needs and stocks for growth over decades. Different retirement accounts have different tax treatments, so coordinate withdrawals with a tax professional or financial planner to minimize taxes on distributions from Roth accounts, traditional accounts, and brokerage accounts.