Managing Withdrawals During Market Downturns

While no one likes to see the value of their 401(k) or IRA decrease, market downturns are far more worrying for current retirees than workers. Those nearing retirement can take comfort in knowing they may be able to defer their Required Minimum Distributions (RMDs) a little longer, but retirees who already rely on withdrawals from their savings accounts don’t have that flexibility.

RMD rules have changed recently. Most current workers won’t be required to draw down funds in qualifying accounts until they turn 75. For people born between 1951 and 1959, RMDs begin at age 73. However, if you’re currently working at age 73 or older you may be able to delay RMDs from your current employer’s 401(k) or 403(b) if the plan allows it and you do not own more than 5% of the company.

If you’re not sure if you are required to take RMDs, it may be in your best interest to consult with a retirement planning professional.

Sequence of Returns Risk

A poorly timed market downturn early in retirement can significantly impact how long savings last. This is known as sequence of returns risk—when retirees withdraw from investments after a market drop, they lock in losses and reduce future growth potential. Unlike workers who can wait out volatility, retirees making withdrawals may struggle to recover losses, making strategic adjustments even more important.

Alternative Income Streams: Preparing for Volatility

If there’s a silver lining to downturns for people still saving for retirement, it’s that they serve as a reminder to incorporate income-producing assets like annuities, rental properties, or stable dividend stocks. Having reliable, non-market-dependent income sources can reduce pressure to sell investments during a downturn.

If you’re a current retiree who depends primarily on an IRA or 401(k) to fund your retirement, you may still have some options to mitigate the long-term impact of market fluctuations.

Roth Conversions: A Strategic Option During Market Downturns

Converting tax-deferred funds to a Roth IRA during a market dip can have two potential benefits:

• The tax bill is based on the account's value at the time of conversion, meaning a lower balance due to a downturn results in a smaller tax burden.
  

• Once in a Roth IRA, the funds grow tax-free, and there are no RMDs, allowing retirees to control when and how they withdraw their money. If a retiree does have alternative income sources, they can choose not to withdraw anything until the market rebounds.

The main downside to converting savings to a Roth IRA all at once is having to pay a large one-time tax bill. For those in a lower tax bracket during retirement, converting in stages over several years may be a way to minimize the immediate tax impact.

Qualified Charitable Distributions (QCDs):

Retirees 70½ and older can donate up to $100,000 annually from an IRA to a qualified charity, satisfying RMDs without raising taxable income.

Long-Term Strategies for Market Resilience

A Dynamic Withdrawal Approach: While some retirees must take RMDs during a downturn, there’s no obligation to withdraw more than the minimum. Adjusting amounts based on market performance may allow you to preserve assets.

Rebalancing the Portfolio: Shifting some investments into lower-volatility assets may help reduce your exposure to market swings. A professional investment manager may be able to recommend an asset mix that can help shield your portfolio from volatility and risk.  

Tax-Efficient Withdrawal Sequencing: Withdrawing from taxable accounts first, then tax-deferred, and Roth accounts last to maximize tax efficiency over time.

The Bucket Strategy: Some retirees use a bucket strategy to manage volatility, dividing their assets into short-, medium-, and long-term investments. This approach ensures that cash reserves cover immediate expenses while allowing long-term investments time to recover from downturns. Having a dedicated cash or bond reserve can provide financial flexibility, reducing the need to sell stocks at a loss.

Work With Financial Advisors Who Understand the Concerns of Retirees and Savers

Regularly reviewing and adjusting withdrawals—especially during market downturns—can help retirees maintain financial stability while preserving assets for the future. Many retirees, even those who actively monitor their portfolios, may be unsure of the best strategy to safeguard their savings. The retirement planning and investment management professionals at Fullerton Financial Planning are here to help. Schedule a meeting today by calling (623) 974-0300.