The Retirement Move That Could Backfire When the Market Drops

Many retirees focus so much on investing that they fail to account for moments when having cash on hand is preferable. Having available cash in an emergency fund might not seem like a good move when the stock market is rising, and your retirement accounts are compounding. However, if the market drops, not having enough cash on hand can lead to financial problems.

If you are on track for retirement or just recently retired, your cash holdings and withdrawal strategy in the first few years can help preserve your portfolio over time. Here are some of the risks of keeping too little cash on hand as a retiree.

You may have to sell investments at the worst time

If you have most of your retirement funds tied up in your investments, you may have to sell them at the worst time if you need to access cash for your bills. Retirees don't typically have paychecks, and Social Security checks are usually not large enough to cover all monthly expenses.

So, many retirees find themselves withdrawing from their retirement accounts, even in a market downturn. This isn't ideal because it means that you cement the investment loss and also make it more challenging for your overall portfolio to recover.

Not having cash on hand for emergencies and unexpected expenses

Data from the Center for Retirement Research shows that the average retired household spends 10% of their income on unexpected expenses annually. Not having cash set aside for emergencies can make it challenging to handle unexpected costs, such as health care expenses, home maintenance, and more.

If retirees don't have an emergency fund during a market downturn, they may have to make hard choices like withdrawing money from their portfolio or going into debt in retirement, which can negatively impact their cash flow.

Makes retirees more likely to make panic investing decisions

It's common for people to feel stressed during stock market dips. Many retirees may worry about not having enough income in the future, which can lead them to make panic-driven investment decisions, such as withdrawing money during a downturn.

Having an emergency fund can relieve this stress and help retirees feel more secure. More importantly, it can help them avoid making investing decisions that can have long-term negative impacts on their retirement accounts.

Early market losses in retirement can have a long-term impact

Retirees who experience market losses in their first few years of retirement face a sequence-of-returns risk. What that means is that retirees who have to sell their investments early in a downturn face long-term consequences for their portfolio returns. 

Experts at Schwab say that sequence-of-returns risk could prevent people's portfolios from lasting as long as they need them to in retirement.

There are tax implications if you make larger withdrawals than usual

Another important consideration when it comes to your withdrawal strategy in retirement is that taking a large withdrawal could have an impact on the amount of taxes that you pay. 

Distributions from 401(k)s are considered ordinary income. Depending on your overall financial picture, making a large withdrawal could lead to a high tax bill.

Downturns may not be quick, so a cash cushion helps

Historically, some market downturns can last a prolonged period of time, while others are relatively quick. For example, the stock market downturn in December 2021 lasted approximately 18 months. Other market downturns have lasted only a few months. 

Because the stock market is unpredictable, having a cash cushion can help retirees sleep at night and protect themselves against making unnecessary withdrawals.

Where retirees can go to get financial help

Even if you have never worked with a financial advisor before, retirement is the ideal time to get advice about your financial plan. A financial advisor can review your retirement portfolio and expenses, and listen to your goals to create a workable plan for your future. Financial advisors can also recommend accountants and estate attorneys who can help ensure that you have all of your financial paperwork in order.

Some financial planners are fee-only, meaning that you pay them a one-time fee to create a financial plan. Others charge a percentage of your portfolio as their fee.

Bottom line

As a retiree, it's important to make the right moves financially. That's because retirees live on a fixed income and need to make sure that their nest eggs last for many years. Having too much cash on hand and having too little cash on hand are both situations that can put retirees in financial jeopardy.

For that reason, retirees need to find a balance between having available funds to handle emergencies and to pay for expenses during market fluctuations while also leaving enough in their accounts to compound and grow for the future.

You May Also Like

$200 Bonus + Up to 5% Cash Back

Earn a $200 bonus after spending $500 on purchases in your first 3 months from account opening. Member FDIC

SPONSORED

7 Ways To Get Money Without Getting A Second Job

By FinanceBuzz Editors

How To Save Money on Car Insurance: 12 Ways to Lower Rates

By Elyssa Kirkham

10 Things Seniors Born Between 1941-1969 Could Take Advantage Of

By FinanceBuzz Editors

19 Dumbest Things Smart People Waste Money On

By Team FBZ

7 Moves If You Want to Stop Living Paycheck to Paycheck

By FinanceBuzz Editors

7 Clever Ways to Crush Your Debt

By FinanceBuzz Editors

Save Money and Get Huge Discounts on Everyday Purchases

AARP Benefits

• Huge discounts on travel, groceries, prescriptions and more
• Access to financial planning resources and health tools
• Join AARP and get 25% off with automatic renewal

Become a member now!

---

Subscribe Today

Unlock the Best Banking Deals and Bonuses

From high-yield savings accounts to cashback checking and sign-up bonuses, we bring you the best banking offers to grow your money smarter.

or

SEE TOP BANKING OFFERS →

By submitting this form you agree to receive emails from FinanceBuzz and to the privacy policy and terms