Three Steps to Protect Your Retirement from Coronavirus Market Swings

After weeks of resistance, the U.S. stock market has been laid low by the global spread of the coronavirus (COVID-19).

From February 19th through February 27, the S&P 500 fell more than 11%, as the reality set in that our economy will slow at least temporarily as production in major supply markets (namely, China) is curtailed, and consumer spending may decrease. The market opened down an additional 3.7% on Friday, perhaps reflecting anxiety that the end is nowhere in sight—the virus is now marching through Europe and is expected to expand in the United States.

For retirees, the rallying cry that market sell offs are an opportunity to buy cheaper shares can ring a bit hollow. Sure, that’s great advice when you're building up your retirement funds, but once you’ve begun to make withdrawals from those accounts, stock drops can cause serious stomach churn. “When you're in the decumulation phase it seems to ratchet up the worry, no matter how many corrections/bear markets you may have lived through,” says certified financial planner Kimberly Foss, found of Empyrion Wealth Management in Roseville, Calif.

Deep breath. If you’ve followed a few key portfolio strategies for your retirement years, your best move right now is to sit tight.

“If you have the proper asset allocation based on your goals and, most importantly, time frame, along with an adequate cash bucket, then the correct action is no action,” says Timothy Wyman, a certified financial planner and managing partner at The Center for Financial Planning in Southfield, Mich.

The coronavirus slide is just the most recent example of how using a three-bucket strategy can make it easier to stay calm(er) during stock sell-offs. With plenty stuffed in a cash bucket and a bond bucket, you can generate the income you need—and take any required minimum distributions(RMDs)—without needing to touch your stock bucket when it is down.

Buckets 1 and 2 (cash and bonds) buy time for bucket 3 (stocks) to recover. And if necessary right about now, remind yourself that you do indeed want to stick with stocks. They offer the best shot of delivering inflation-beating gains over the long-term, and inflation is a very real threat for a retirement that can stretch 30 years.

Tap your cash

Sam Stovall, managing director of U.S. equity research at CFRA, has crunched stock data dating back to World War II and found that when losses are relatively mild (less than a 20% decline) it typically takes no more than four months or so for markets to recover. When a bear descends with losses of 20% or more, the average recovery time is around two years.

If you have a cash bucket filled with enough money to pay for at least two years of living expenses that exceed what your guaranteed income from Social Security and other sources covers, you’ve bought your stock portfolio a lot of time to recover.

Add a bond buffer

At this life stage you likely have 50% or more of your portfolio invested in bonds. That means that at least half of your portfolio has actually increased in value during the stock slide that started on February 19th. The Bloomberg Barclays U.S. Aggregate bond index —the benchmark tracked by core bond funds— is up 1%. If you are using Treasury bonds in your portfolio, you’ve likely seen an even bigger gain.

When stocks are down, pulling your required minimum distribution (RMD) from the bond investments in your retirement accounts is another way to buy your stocks time to recover.

Dial up some perspective

Getting a bit caught up in the unnerving headlines only proves that you're human. That said, your experience is a great asset to tap.

Anyone at least 65 years old has likely been investing for 40 years. That means you and your portfolio have survived five official bear markets, not even including the near-bear slide in late 2018, when the index lost more than 19%, before a rapid rebound.

The worst stretch was the tech bubble bear market that hit from 2000-2002. It took more than 5 ½ years for stocks to claw back to where they were before the slide started, according to the Portfolio Visualizer website. That’s no one’s idea of fun. But if you have a bucket strategy in place, you could generate more than five years of income from your cash and bonds, without needing to pull any money from your stock portfolio. “With the markets, our best friends are patience, discipline, and sticking to a preplanned strategy that has been developed well before retirement,” Foss says.