You Don’t Need a Flawless Retirement Strategy. You Need a Plan for a Tough Year

A strong retirement strategy should not assume your finances and lifestyle will stay the same forever.

In retirement, monthly spending may shift, your portfolio may swing when withdrawals begin, and healthcare expenses may continue to rise. Preparing for a “bad year” can show whether you can handle several challenges at once.

Must Read

Why some retirement plans fall apart

Retirement plans often hold up until expected returns and inflation move in the opposite direction from what retirees planned for. Inflation can jump unexpectedly and force larger withdrawals. At the same time, a market pullback can require retirees to sell more investments just to cover the same bills.

Guidelines can be useful, but no two retirees face exactly the same conditions from one year to the next. Some years bring market drops of 20%, while other years deliver gains above 20%. What counts as a “bad” year differs by person, but it may include a bear market, surprise medical costs, home maintenance, high inflation, or a loss of income such as part-time work.

Planning for rough years may not be pleasant, but it is necessary.

What belongs in a ‘bad year’ plan

A cash reserve is a key part of a plan for a difficult year because it reduces the need to sell investments during market declines. Many financial advisers suggest that retirees keep enough cash to cover one to two years of living costs. When deciding how much cash to hold, factor in the difference between income sources such as Social Security and your monthly expenses.

It can also help to divide spending into categories for needs and wants. For example, travel and restaurant meals can be trimmed during a rough year, but essential bills such as utilities still have to be paid. Cutting expenses wherever possible lowers the amount you need to withdraw from your portfolio to stay on track. Fewer withdrawals can reduce the long-term damage a market correction may do to your net worth.

Taking on extra side work during a bad year can offer another source of income, alongside Social Security, pensions, annuities and other payments. Homeowners may also consider using part of their home equity, though that adds risk and should be weighed carefully.

You also need to account for taxes and, depending on your age, required minimum distributions, or RMDs.

How to test your plan before retirement

Testing your plan before retiring can help you decide whether retirement makes sense for you now. Begin by looking at how your finances would change if your portfolio suddenly fell 20% and inflation stayed higher than expected. You should also think about what happens if an emergency expense comes up.

Review your current spending to separate essential costs from ones you can reduce. That can help you choose a more flexible retirement date. Working a few extra months may strengthen your cash cushion enough to avoid selling stocks for more than a year if necessary. It can also help you determine the best time to claim Social Security, which has a major effect on your guaranteed income over time.

You do not need a perfect plan. You just need to be ready, keep an eye on your finances, and adjust as needed.