July 24, 2024

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What “stay the course” means if you’re retired

When your nest egg is shrinking in response to factors outside your control, the recommendation to stay the course may feel off base. However, chances are, you’re already staying the course. In fact, recent Vanguard research shows that more than 90% of Vanguard U.S. self-directed individual investors have stayed the course and not traded in response to the market decline.*

“Stay the course” doesn’t mean do nothing. It means stick to your investment plan. If you’re retired, focus on what you can control, such as your retirement spending strategy and asset mix.

It’s not a good idea to trade in response to a market decline, but you can do some things to ease your nerves.

Invest in cash—in moderation

If you invest in any type of fund besides a money market fund, the value of your portfolio will fluctuate in response to market movement. But an investment’s share price isn’t the only factor that matters: Even if your stock fund lost value, it’s still generating income (dividends and capital gains). And if you’re reinvesting that income, your portfolio is growing by acquiring more shares.

In spite of this, you may feel tempted to preserve the money you have by moving it into a money market fund. If you don’t have a cushion of cash reserves in another account (such as a bank account) and rely on your investments to cover daily living expenses, it’s okay to safeguard a portion of your portfolio. Moving certain investments to cash reserves to cover your living expenses for the next 1 to 2 years can lessen the impact of market swings and make it easier to pay bills. Just keep in mind that money market funds only generate a small amount of income.

Allocating too much of your portfolio to a money market fund can increase the risk that the price of goods and services will increase faster than the value of your investment over time (a.k.a., inflation). This is an important risk to remember considering life in retirement can last 20 to 30 years or more. For this reason, keep the bare minimum of cash in your portfolio to make you feel comfortable.

Gut-check your asset mix

You’ve heard it before: Base your asset mix on your goals, time frame, and risk tolerance. Your goals and time frame will probably remain static over time, but the amount of risk you can tolerate will likely change. So it’s smart to reevaluate your risk tolerance regularly, or at least once every 2 years. (Use our investor questionnaire or partner with an advisor for help.)

But what if you haven’t thought about risk until recently and market conditions have forced you to identify how you really feel?

If you’re losing more than you can stomach, consider updating your target asset mix, which is the ideal mix of stocks, bonds, and cash in your portfolio.

Your target mix is the blueprint you follow when you’re building your portfolio. If your current target asset mix exposes you to too much risk, consider selecting a more conservative mix; then rebalance your portfolio gradually to align with your new target. For example, direct investment distributions (dividends and capital gains) from stock funds into bond funds to increase your bond allocation over time. This strategy ensures you’re not trading in response to market declines and prevents you from locking in losses.

On the other hand, if you’re comfortable with how your portfolio is responding to market volatility, keep an eye on how your asset mix compares with your target. Rebalance regularly (annually, semiannually, or quarterly) or if there’s a difference of 5 percentage points or more to ensure your portfolio stays in line with your goals, time frame, and risk tolerance. 

Cut spending

Nobody wants to spend less because the market is down. But you can control what you spend and help your portfolio last longer in a low-return environment. If cutting your spending is the best option you have to ensure you don’t outlive your savings, consider it.

Let’s say you retired at the beginning of the year when your portfolio was valued at $950,000.

Assuming a 6% average annual return throughout retirement, you estimate you’d be able to spend about $3,500 a month. If all other factors remain the same but your portfolio balance declines over 25% (to $700,000), your estimated monthly income drops by less than $1,000 a month (to $2,600).**

This hypothetical example does not represent the return on any particular investment and the rate is not guaranteed.

Your estimated monthly income can change daily in volatile markets. We recommend revisiting your retirement spending plan annually. (Try our Retirement Income Calculator or partner with an advisor for help.)

Earn income

As a society, we’re limiting social interactions, working remotely, and avoiding public places to help stop the spread of COVID-19. Unfortunately, these restrictions are hitting certain small businesses and industries hard—especially those in the entertainment, hospitality, and arts communities.

Under the current circumstances, earning income may not be an option. But if you have the opportunity to go back to work in some capacity later on, the additional income can help offset what you might have to withdraw from your portfolio now.

Working in retirement isn’t as unusual as it sounds: Recent research shows over half of workers (55%) plan to work in retirement.† Working might not be as bad as it sounds either: The same research found that 30% of workers cite some form of work as a retirement dream.

There may be limited job opportunities on the horizon right now. But if you network and keep your résumé current, it will be easier to find work in the future when things normalize.

It’s not easy

Staying the course isn’t easy, but you’re probably weathering current conditions better than you think. Focus on what you can do during market volatility, and you (and your portfolio) will get through this difficult time.

*U.S. household trading: Coronavirus market volatility, Vanguard, March 23, 2020.

**Vanguard’s Retirement Income Calculator.

19th Annual Transamerica Retirement Survey: A Compendium of Findings About U.S. Workers, 2019.