If you’re retired, you probably withdraw from your retirement accounts regularly. First, to support your lifestyle, and second, to meet your required minimum distributions. But what about years when the market or your individual portfolio isn’t doing so well? You have to juggle three goals now: first, fund your retirement; second, meet RMDs; and third, keep your portfolio flourishing for long-term gains. Here’s how to withdraw from your retirement account during a down market.

The Danger

Say your portfolio contains some stock from XYZ company that was worth $1000 when you bought it. But now XYZ company isn’t doing so well, and your stock is only worth $500. If you sell it now, you’ll get $500 to pay your bills during your retirement. But you’ll miss out on the next 20 or 30 years of gains you might have had from that stock. And you likely won’t be able to afford to buy it back later, since the market may rise and you’re not in your investing stage of life anymore.

People who retire in a down market or experience one during their retirement may find themselves permanently set back in their retirement. Money that should have lasted 30 years will get lean after 20. Over decades, the economy always grows. That growth needs to be reflected in your retirement portfolio so that you can keep up with inflation. If you lose out on that growth by selling too much in a down market, your retirement may not be funded as well as you planned.

So the crucial point is not to sell stocks that are temporarily low. But this can get difficult when you’re trying to fund your retirement and meet your RMDs. If the whole market is down, what’s left that’s safe to sell?

The Strategy

If you’re under 72, you don’t yet have to take required minimum distributions. So your best bet is not to take any as long as you can afford not to. Your cash reserves, if you have them, should be the first thing you use.

Next, consider your investment accounts. Hopefully, your portfolio is already diverse. As you enter your retirement years, you should have a larger percentage of low-risk, fixed-income investments like bonds than you had when you were younger, for just this reason. When you’re young, you know you’ll have decades yet to make up any drops in the stock market. But in retirement, you need to be able to make withdrawals now. That means having some low-risk options in your portfolio.

So as you work out what to withdraw from your retirement fund, look at bonds and bond funds. These don’t fluctuate nearly as much in a down market as stocks do.

Sell stocks last, as they are the ones most affected by a recession. Stocks that are still doing well are the ones to sell if you have to. Talk to your financial advisor about which stocks are safe to sell.

Tax Considerations

If you’re withdrawing from a traditional 401(k), you will have taxes to pay on your withdrawals. They are taxed as ordinary income rather than capital gains. If, however, you have taxable accounts, you will have to pay taxes on these withdrawals at capital gains rates.

Many experts suggest withdrawing from taxable accounts first, since they won’t be growing tax-free. Plus, if you end up taking a loss on these sales, you will have capital losses to write off on your taxes. 

If you have a Roth account, saving that account for last will allow your money to grow longer tax-free. And, when you withdraw that money later in your retirement, you will owe no taxes.

Staying the Course

Most of all, when considering making withdrawals from your retirement fund during a down market, it’s vital to stay calm. Panic can make people sell in a hurry, afraid of getting nothing for their investment. But when it’s the economy as a whole that’s down, it’s sure to eventually recover. So keep cool and stick to your investment plan.An important ally in your investing is your financial advisor. They’ve been through economic ups and downs before and know how to respond. They can advise you what to sell first and what to hold the longest. To meet the right financial advisor for you, contact us today.

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