Protecting your retirement from market volatility

Morgan Stanley Wealth Management


Summary: The unpredictability of financial markets can disrupt even the best-laid retirement plans. These five strategies may help investors stay on track.


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

1. Invest for income

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 can 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 collected from high-quality bonds and/or dividend-paying stocks, alone, may not be enough to live on.

2. Explore annuities

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.

3. Consider ‘time-segmented bucketing’

Investors regularly use different containers to save for different goals. Funds needed in the near term, for example, may be kept in savings or checking accounts, while funds needed years from now are invested for longer-term growth. This strategy of “time-segmented bucketing” for retirement income isn’t all that different.

With this approach, investors can plan for the early, middle, and late stages of retirement, aligning pools of assets with the different phases. For example, assets that are aligned with short-term needs early in retirement are invested conservatively, in part so that market volatility isn’t as much of a concern as you make withdrawals. Meanwhile, assets aligned with your future spending needs are invested more aggressively for potential growth.

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

4. Consider varying distribution amounts based on market performance

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 locking in investment losses. This might mean limiting distributions from your portfolio to the dividends and bond coupons your investments generate, tapping other income sources, or possibly even exploring part-time work. When the market recovers, you can consider increasing spending levels as the value of your assets potentially begins to grow again.

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

5. Manage portfolio distributions for tax efficiency

Distributions from qualified retirement accounts like 401(k)s and traditional IRAs are considered ordinary income by the IRS. Carefully managing how much you take out of taxable, tax exempt, and qualified tax deferred accounts—and critically, when you take distributions—is important for seeking to lessen the tax bite and stretching out your savings. However, required minimum distribution (RMD) rules that apply to qualified accounts can limit an investor’s ability to control distribution timing to minimize tax costs.

One way to get ahead of higher tax brackets due to RMDs is by deploying an income smoothing strategy. If you are over age 59 1/2, you can consider taking distributions from certain tax-advantaged accounts before they are required in an effort to lower account balances—so there is less money in those accounts when RMDs kick in. Why? Even though you’ll still need to pay taxes on those distributions, you may avoid having larger chunks of your savings taxed at a higher tax bracket once the RMDs begin (thus potentially lowering your effective tax rate in the RMD years).

A downside of this strategy is that tax rates can change, and if they were to go down in the future, that could adversely impact the tax efficiency of the strategy (on the other hand, if tax rates were to increase, benefits would be magnified).

Reducing anxiety in market volatility

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, and February 10, 2022, respectively.

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