October was a brutal month for the stock market, and the recent bout of volatility has no doubt served as a wake-up call for investors of all ages. But while younger folks are well positioned to withstand what could come to be a lengthy downturn, near-retirees are a different story. In fact, if you're planning to retire within the next year, you might, at this point, be teetering on the verge of panic.
The problem with retiring precisely when the market goes south is that you risk taking actual losses in your portfolio when you're forced to withdraw from savings to cover your living expenses. Remember, the value of your portfolio can rise and fall over time without causing you to lose actual money, provided you don't liquidate your investments. But if you're forced to take withdrawals from your savings at a time when your balance is down, you're effectively cashing out investments at a loss in the process. And that could hurt you in the long run.
Here's another way to look at it. Imagine your strategy is to withdraw 4% of your portfolio's value each year in retirement. Let's also imagine your portfolio was worth $500,000 at the start of the year. If we apply a 4% withdrawal rate to that $500,000, we arrive at an annual income of $20,000. But what happens if your portfolio value plunges to $450,000 just as you need to start taking withdrawals? Suddenly, you're only able to take out $18,000 a year, but more so than that, you risk not managing to recover from that $50,000 drop.
Obviously, that's a scary risk. To mitigate it, here are three steps you can take.
1. Have cash on hand
The beauty of having money in a standard bank account is that once it's in there, it can't lose value. If you make a point of building or padding an existing emergency fund over the next number of months, you'll have cash to tap when you actually retire and need money to pay your bills. As such, you might manage to hold off on withdrawing from your nest egg, thereby giving the market some extra time to recover and minimizing the losses you take as a result.
2. Prepare to work
If you worked hard all of your life, getting a job in retirement may not seem ideal. But if the market is in a slump, you're better off generating extra cash yourself than withdrawing from your nest egg at a time when it's down.
Imagine that instead of removing $20,000 from your savings during your first year of retirement, you work part-time and earn that money instead. If the market then recovers after that year, you'll have preserved your nest egg's value by making that extra effort.
You have plenty of options for working in retirement, so think about what you'll enjoy the most. If you liked what you did when you worked full-time, you might choose to consult in your former field. If you didn't, consider starting your own business, one you might find fulfilling and stop regarding as actual work.
3. Apply for a home equity line of credit
If you own a home, applying for a home equity line of credit (HELOC) is one of the most critical moves you can make if the market is tanking as retirement approaches. A HELOC isn't a loan -- rather, it's money you're entitled to borrow against the equity you've built in your home. In other words, when you get a HELOC, you're not borrowing money automatically and accruing interest on that sum. Interest charges only apply once you actually take withdrawals against that loan.
The beauty of having a HELOC is that if your emergency fund, Social Security benefits, and part-time earnings aren't enough to cover your bills in retirement, you can access cash from that HELOC instead of tapping your nest egg at a time when the market is down, thereby allowing yourself to reduce or minimize losses.
Retiring during a down market isn't ideal, but it's a situation that often can't be helped. Unfortunately, we never really know when the market will take a long-term turn for the worse, but if you follow the above steps, you'll be better prepared to withstand that turbulence.