Should I Stop Spending Because the Market is Down?
The question we often hear when markets fall as they have this month is, “Should we stop spending until the market recovers? Should we hold off withdrawing funds right now?”
It’s completely understandable. Nobody wants to feel like they’re “selling low” to fund their lifestyle. The financial media isn’t helping. Headlines seem to scream that disaster is just around the corner.
But here’s what I want you to hear clearly: if you’ve planned properly, a market correction should not change your spending plan.
Let me explain exactly why.
You Are Not Your Portfolio Balance
One of the most important and often misunderstood shifts that has to happen as you transition into your retirement years is this: your spending is not governed, and thus funded, by your daily Retirement Portfolio balance. It’s funded by your withdrawal strategy.
Think about it this way. When you were working, a down market was an inconvenience, maybe even an opportunity to buy more. You didn’t need to sell anything because your paycheck kept arriving.
In retirement, the fear is that you do have to sell, and that you might be forced to sell at the worst possible time.
That fear is legitimate. But it only applies if you haven’t structured your Retirement Portfolio properly for Phase II of your financial life.
The Strategy That Can Change Everything
Unlike your working years when every dollar could be invested for the long term, your first move isn’t about what and where to invest. It’s about what portion of it to protect from short-term volatility.
This may sound rather odd, but think about it.
You don’t want to have the funds you will withdraw in the near future subject to significant market volatility.
Why take the risk with that portion of your Retirement Portfolio when you don’t have the time to recover before making planned withdrawals?
As legendary investor Warren Buffett said, “Investing is the transfer to others of purchasing power now with the reasoned expectation of receiving more purchasing power – after taxes have been paid on nominal gains – in the future. More succinctly, investing is forgoing consumption now in order to have the ability to consume more at a later date.” (https://www.berkshirehathaway.com/letters/2014ltr.pdf)
Historically, on the path to long-term growth, stock market prices temporarily fall about 29% of the time. That’s not a prediction of doom; it’s simply reality. And if you haven’t accounted for that reality in your plan, a correction like the one we’re experiencing right now can put you in the worst possible position: forced to sell low just to cover your current spending needs.
One approach to consider is holding several years’ worth of your anticipated withdrawals strategically positioned in money market funds and short-term fixed income instruments that are less sensitive to short-term market swings. To further cushion your cash flow, you can also direct your dividends from your long-term equity holdings into these short-term instruments.
Having this targeted allocation strategy in place can provide you with more confidence to continue spending on your priorities even during common and temporary market downturns like we recently experienced.
The Trap Many Fall Into
Here’s what I’ve seen happening to people who haven’t made this mental shift: they feel compelled to squeeze every ounce of return out of every single dollar they own. When markets are climbing, that feels smart. When markets fall, it becomes paralyzing.
They stop spending. They delay their vacation. They hesitate to help their grandchildren with tuition. They go back to a scarcity mindset we’ve all heard: “I can’t afford it. I’m on a fixed income now.”
And in doing so, they rob themselves of the life they carefully planned for.
As I’ve shared many times, the best investment allocation is not necessarily the one with the highest theoretical return. It’s the one you can remain invested in during all market conditions, including this one.
What This Means for You Right Now
If your Retirement Blueprint has been designed properly, this recent market downturn may not lead you to change your spending plans. Your near-term cash flow needs may be covered, and your long-term portfolio may remain positioned to recover and grow.
If you’re feeling anxious right now, that’s worth paying attention to, not because the market is telling you something, but because your feelings might be telling you that your plan and strategy may need a closer look.
That’s exactly what we’re here for. Please take us up on the opportunity.
This is intended for informational purposes only. You should not assume that any discussion or information contained in this document serves as the receipt of, or as a substitute for, personalized investment advice from Savant. Please consult your investment professional regarding your unique situation.
Jack Phelps
Managing Partner / Financial Advisor