Once you've left the workforce, chances are good you'll rely on your investment accounts as an important source of retirement income. And when you need the money in your 401(k) or IRA to cover your basic living expenses, a stock market crash can feel like a major financial disaster rather than just a natural part of market cycles.
The good news is that when the market inevitably crashes it doesn't have to take your retirement dreams down with it. If you follow these three steps, you'll ensure that a downturn doesn't derail your future financial security.
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1. Maintain some liquid cash outside of the market
As a retiree, you'll need money to live on to supplement your Social Security. While you'll likely rely on your investment accounts to provide it, you don't want to be forced to sell investments and pull money out of these accounts at a bad time (such as right after a market crash).
To make sure you don't have to lock in losses by selling at a bad moment, try to maintain some accessible cash outside of the market that you can live on during a downturn.
Ideally, you should have enough liquid cash to cover around two to five years worth of living expenses without having to pull from your investment accounts. This will give you time to wait out a bear market in the hopes of recovering any investment losses.
2. Adjust your withdrawals as needed
If your portfolio takes a hit, you may not be able to withdraw quite as much money from it as you could when you were in better shape. That's why it's often a good idea to choose a percentage-based withdrawal rate rather than a flat dollar amount.
The Center for Retirement Research recommends using the Required Minimum Distribution tables (RMD tables) the IRS has created to determine what amount you should withdraw, even if you aren't required to take RMDs. The Center also used those tables to establish recommended withdrawal rates for younger retirees.
By withdrawing the recommended percentage from your portfolio based on your age you'll always be confident you're taking a safe amount of money out of your accounts, since you'll naturally withdraw less when your balance falls.
3. Maintain an appropriate asset allocation
Retirees can't afford to be over-exposed to the stock market, as this could mean suffering outsized losses in the event of a crash.
Since you don't have decades to wait for a market recovery or time to invest and rebuild a portfolio that experienced unexpectedly large losses, you'll need to be more conservative in your investments -- which means regularly rebalancing your portfolio to ensure you're exposed to the right level of risk.
You can develop a personalized plan for your asset allocation based on your individual risk tolerance. If you aren't sure how to do that, a simple rule of thumb is to subtract your age from 110 and invest that percent of your portfolio in the stock market. If you're 80, for example, that would mean you'd have just 30% of your money in equities.
By making sure you aren't over-invested in stocks, that you have some liquid cash to rely on, and that you aren't withdrawing too much from your retirement accounts given the current state of your portfolio, you can preserve your nest egg, and a market crash shouldn't destroy the chances of your money lasting for the rest of your life.
