As a general rule, if the stock market tanks just as your retirement date is approaching, it's a good idea to delay your workforce exit if you can. Retiring into a down market could put you at risk of depleting your savings. Plus, it can be an extremely stressful way to start this new stage of life.
But what if the stock market crashes shortly after you retire? At that point, it's not as easy to pivot. If you've already resigned from your job and haven't worked for a good number of months, returning to full-time employment may not be an option.
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The good news is that there are steps you can take to mitigate this unfortunate situation. Here's how to cope with a down market shortly after your retirement kicks off.
1. Assess your spending and aim to cut back
The danger of a market decline early on in retirement boils down to sequence of returns risk. If you're forced to sell assets from your IRA or 401(k) early at a loss, your portfolio may never fully recover. That means you could increase your risk of running out of savings eventually.
To be clear, locking in permanent losses at any point in retirement can be detrimental to your long-term financial health. But doing so early on can be even more problematic because assets you sell at a loss don't get an opportunity to recover and benefit from future market growth.
To deal with an early market downturn, assess your spending and see if there are ways to cut back. If, for example, your plan was to withdraw $120,000 a year from your IRA or 401(k), but $20,000 of that is for travel, cutting that sum in half could mean taking that much less money out of your savings.
2. Spend cash if you have it
Before retirement, it's a good idea to move some of your money out of stocks and into safer assets like bonds and cash. And on the cash side, it's wise to maintain a cushion to cover two to three years' worth of living expenses. This gives you an opportunity to ride out market downturns and allow your portfolio to recover without locking in losses.
If the market tanks right after you start retirement, don't just preserve your cash for the future. Instead, use it. A situation like this is exactly what it's there for.
Going back to our example, say you need $120,000 a year to cover your essential needs and wants. If you have $240,000 in cash, you can cover two years of bills without taking a single loss in your portfolio. If the market recovers after 18 months, you could avoid a huge setback.
3. Try to work part-time
It's not an easy thing to accept the idea of working in retirement -- especially early on, when you're just getting used to having your days to yourself again. But even a modest paycheck could help take pressure off of your portfolio during a market decline.
If you've only recently retired, you may still have solid connections in your former industry. And if that's the case, you may want to see if it's possible to do some consulting work. The nice thing about that arrangement is that you may be able to set your own hours or do your job from home. If you have memories of a horrid commute, that's important.
A market crash early in retirement might seem like it could derail your plans. But it doesn't automatically have to. The key is to be as flexible as possible with your spending, use the cash you've accumulated to leave your portfolio intact as long as you can, and be open to earning some money temporarily to get through this rough patch.
