Protecting your retirement from market volatility

A rule of thumb in volatile markets is to have patience: If you can ride out the market’s ups and downs, asset prices should eventually recover. Unfortunately, retirees don’t always have the luxury of time. If you’re retired or approaching retirement, you may need to tap your investments for income when markets are volatile, potentially locking in losses that can hurt your portfolio in the long-term.

Fortunately, planning ahead can go a long way toward helping you protect your retirement when market volatility hits.

Daniel Hunt, Senior Investment Strategist at Morgan Stanley Wealth Management, offers five strategies to consider.

One way to help reduce your retirement plan’s vulnerability to a volatile market is by considering investment-grade bonds and dividend-paying stocks. Investors may be able to collect regular income from these investments to support spending needs, while leaving the principal investments untouched—­at least until the market recovers.

However, there are drawbacks to consider. Some companies may reduce or suspend dividend payments during extended periods of market volatility or economic stress. What’s more, depending on the size of your nest egg and your regular spending needs in retirement, the income you can collect from high-quality bonds and/or dividend-paying stocks may not be sufficient to live on.

Annuities are another way to provide a reliable stream of income that may reduce or even eliminate the need to sell portfolio assets with high return potential during moments of market stress. What’s more, annuities with guaranteed income-protection benefits provide a set amount of income for life, which means you don’t run the risk of ever outliving your savings.

Of course, there are drawbacks to annuities. For example, the most basic kinds are essentially fixed income instruments that may not have growth potential.

Variable annuities and fixed index annuities are two options designed to address such drawbacks—for example, by providing investors with some exposure to potential equity-market growth. Both may offer guaranteed income and payout rates that are often higher than the yields on certain equity and fixed-income investments, and so may be well-suited for investors concerned about the stability of their retirement income.

With this approach, investors can plan for the early, middle, and late stages of retirement, by aligning pools of assets with the spending needs associated with different phases of their retirement years. For example, assets that are aligned with needs early in retirement are invested conservatively, in hopes that market volatility will have minimum impact on the principal value of these investments as you draw them down by withdrawals. Meanwhile, assets aligned with your future spending needs or gifting plans are invested more aggressively for potential growth since they will have more time to potentially recover from volatility the investor might encounter over this longer horizon.

Admittedly, a principal drawback of time-segmented bucketing is that it can be difficult to implement, as it involves managing multiple asset.

Another strategy to consider for protecting your portfolio is tailoring your spending to market performance. When markets dip, you can tighten your belt to avoid selling investments when values are low. This might mean limiting distributions from your portfolio to the dividends and bond coupons your investments generate, tapping other income sources, such as an accruing annuity or other pool of assets, or possibly even exploring part-time work. When the market recovers, you can consider increasing spending levels or replenishing outside reserves as the value of your assets potentially begins to grow again.

A flexible spending approach can help support long-term retirement outcomes. By using funding ratio —a key metric that evaluates an investor’s retirement readiness by measuring the value of retirement assets relative to projected spending— you can decide whether to hike or cut your spending at a rate commensurate with the rise or fall of your portfolio.

This approach is not without potential downsides, as aligning your finances with market performance can lead to less predictable spending and lower overall consumption.

Distributions from qualified retirement plans, such as a 401(k) plan and traditional IRAs, are considered taxable ordinary income by the IRS. Managing how much you take out and when you take it out is important if you’d like to lessen the tax bite and stretch your savings.

Once you reach a certain age, you must start taking out a minimum amount each year, called a required minimum distribution (RMD). This makes it harder to control when and how much you withdraw, and it can lead to higher taxes.

For some, one way to get ahead of higher tax bills from RMDs is by using an income-smoothing strategy. However, while withdrawing money today may result in being taxed less later on, it can also lead to an increase on your current taxes.

If you are over age 59 ½, you can consider taking distributions from certain tax-advantaged accounts early, even before you are required to do so by the RMD rules. By doing this, you lower the amount left in the accounts, so when you reach the age where RMDs start (at age 73 for people born after 1950 until 1959, 75 if after 1959), you may have less money being taxed later on.

Even though you’ll still have to pay taxes on the money you take out, this strategy can help you avoid a higher tax bracket later when RMDs kick in. That could save you money in the long run.

One downside of this strategy is that if tax rates drop in the future, you may end up paying more tax now than you would’ve later. On the other hand, if tax rates were to increase, taking out money earlier could save you even more. Nonetheless, where taxes are involved always consult with your own tax advisor to review your personal circumstances when making important decisions.

While it can be stressful to see headlines about threats to the value of your nest egg, a volatile market does not necessarily mean danger for your retirement plans. Try to tune out the daily noise and stay focused on the bigger picture.

The sources of this article, On Retirement: Retirement Income in Volatile Markets and Retirement Income and Sequence of Returns Risk, were originally published on April 16, 2020, February 10, 2022, and August 27,2024 respectively.

CRC# 4091945 06/2025