3 Down-Market Strategies for Retirees

Key Takeaways

• Falling stocks and lackluster bond performance have left some retirees feeling unsettled.
• Cutting spending during down markets could give your portfolio room to recover when the markets improve.
• Look at the fund expense ratios and administrative fees in your portfolio for potential cost savings.

Susan Dziubinski: Hi, I'm Susan Dziubinski with Morningstar. Both stocks and bonds have taken a beating so far this year, and as a result, some retirees may be feeling dispirited. Joining me to discuss three take-control strategies for retirees is Christine Benz. Christine is Morningstar's director of personal finance and retirement planning.

Hi, Christine. Good to see you.

Christine Benz: Hi, Susan. Great to see you.

Dziubinski: Let's start out by talking about, and that's probably obvious, but why are down markets especially unsettling for retired investors?

Benz: The big reason, I think, is that for retirees, their portfolios probably feel like a finite resource. So, when they see them dwindle, they obviously worry that there may be implications for their spending in retirement. Will they have to spend less? Will they have to cut out things that they're enjoying in retirement? So, there is that aspect of it that I think is kind of an evergreen issue with retirees in down markets. One issue that has been a little bit different this time around is that retirees haven't necessarily had good performance from bonds to offset their falling stocks. We've had poor performance from both stocks and bonds this year, and I think that has contributed to this period feeling especially unsettling for a lot of retirees who thought they were doing the right things by building a balanced portfolio.

Dziubinski: What stage of retirement an investor is in, what sort of impact, or how does that affect how that investor should be thinking about a weak market?

Benz: This is really important, Susan. And in general, a weak market is negatively impactful, especially for people who are very early in retirement or even people who are approaching retirement. And the key reason is that at this life stage, your portfolio is usually at its largest, so if it incurs big losses at this time and you don't make changes to your spending, if you're overspending from a portfolio that's simultaneously dwindling, that just leaves less in place to repair itself when the markets eventually recover. So, that's sequencing risk. That's why we often evangelize about the importance of being willing to adjust spending, or potentially adjust your asset allocation as you are coming into retirement so that you can be ready in case the market sells off in this way.

1) Cut Your Spending in Retirement During Down Markets

Dziubinski: Let's get into the strategies you wanted to talk about today. And that first one does relate to spending and sort of perhaps rethinking or adjusting your spending in retirement in a weak market.

Benz: That's right. We now have a really deep body of research, including some of the work that we did on the topic of retirement distribution strategies last year that points to the value of varying your portfolio withdrawals if you possibly can, that it helps improve your portfolio's sustainability over that long time horizon. So, if you're able to take less in down markets, that means that you could potentially take more in up markets. The tough part about telling people to cut their spending right now is that we also have inflation, and that makes it very difficult for people to curtail expenses because we're seeing inflation come on strong in some categories that are kind of fixed, nondiscretionary categories where people don't have a lot of leeway. But ideally, if you can cut spending a little bit during this period as your portfolio is down, that will leave more in place to recover when the markets eventually do.

2) Comb Through Your Portfolio to Look for Potential Cost Savings

Dziubinski: Now, another strategy you talk about to consider is doing a cost audit. So, let's talk a little bit about what a cost audit would achieve for a retiree who might be concerned about the weak market, and how one would go about doing it?

Benz: Right. I often think of Jack Bogle's great comment, which is that you get what you don't pay for in investing. And in contrast to cutting your spending, this one should be relatively painless. You just want to go through your portfolio, look at your fund expense ratios, those are really the low-hanging fruit that if you can potentially swap into lower-cost investment funds that often sets you up for better performance than you would have in the higher-cost investment products. And don't just stop with the fund expense ratios. Look at the whole array of costs that you're paying. If you're paying a financial advisor, that can certainly be money well spent. But just make sure that you're getting good value for your money. And then, also look at the whole array of administrative fees that you might be paying. The good news is that many of these fees have felt some serious downward pressure over the past decade, but you still may be paying some account maintenance fees. Really nickel and dime your investment providers in this environment.

3) RMD and Qualified Charitable Distribution Strategies for Retirees

Dziubinski: And then, lastly, Christine, your final strategy relates to required minimum distributions from tax-deferred accounts. Is there any way to sort of soften the blow there?

Benz: Well, the tax bill is kind of is what it is. It's set based on your balance at the end of 2021. That will dictate how much RMD you need to take for 2022. One evergreen strategy, not necessarily a down-market strategy, is to look at a qualified charitable distribution where you send a portion of your IRA to a charity. And the good news is that if you do that, the amount that you do contribute to charity will escape taxation altogether. Another strategy that I think pertains specifically to down markets is the idea of taking your distributions from your RMDs, from your IRAs in kind. So, if there are securities that have fallen in value that you want to maintain economic exposure to, you can take them and transfer them to a taxable account, to a brokerage account. The tax bill on that distribution will be the same. But if you don't need the funds for your living expenses, you can maintain those same securities just in a different silo. So, I think that that can be a nice strategy for retired investors who do want to maintain positions even though they are subject to required minimum distributions.

Dziubinski: Well, Christine, thank you for your time today and for these strategies for retirees in a down market. We appreciate it.

Benz: Thank you so much, Susan.

Dziubinski: I'm Susan Dziubinski with Morningstar. Thanks for tuning in.

Watch “How to Ensure a Bear Market Doesn’t Blow Up Your Retirement” to get additional advice from Christine Benz.