A bad stock market is unsettling for any investor. For retirees and near-retirees, though, bad markets can be dangerous. Stock market losses early in retirement can significantly increase your chances of running short of money. But there are ways to mitigate the risk. Financial planners say the following actions can help make your money last.

Make sure you’re properly diversified

When the stock market is booming, investors can be tempted to “let it ride” rather than regularly rebalancing back to a target mix of stocks, bonds and cash. Not rebalancing, though, means those investors probably have way too much of their portfolios in stocks when a downturn hits.

The right asset allocation depends on your income needs and risk tolerance, among other factors, but many financial planners recommend retirees keep a few years’ worth of withdrawals in safer investments to mitigate the urge to sell when stocks fall.

Certified financial planner Lawrence Heller of Melville, New York, uses the “bucket” strategy to avoid selling in down markets. Heller typically has clients keep one to three years’ worth of expenses in cash, plus seven to nine years’ worth in bonds, giving them 10 years before they would have to sell any stocks.

“That should be enough time to ride out a correction,” Heller says.

Near-retirees who use target-date funds or computerized robo-advisors to invest for retirement don’t have to worry about regular rebalancing — that’s done automatically. But they may want to consider switching to a more conservative mix if stocks make up over half of their portfolios.


Start smaller, or be willing to cut back

Historically, retirees could minimize the risk of running out of money by withdrawing 4% of their portfolios in the first year of retirement and increasing the withdrawal amount by the inflation rate each year after that. This approach, pioneered by financial planner and researcher Bill Bengen, became known as the “4% rule.”

Some researchers worry that the rule might not work in extended periods of low returns. One alternative is to start withdrawals at about 3%.

Another approach is to forgo inflation adjustments in bad years. Derek Tharp, a researcher with financial planning site Kitces.com, found that retirees could start at an initial 4.5% withdrawal rate if they were willing to trim their spending by 3% — which is equivalent to the average inflation adjustment — after years when their portfolios lost money.

“You don’t actually cut your spending. You just don’t increase it for inflation,” says certified financial planner Michael Kitces.

Pay off debt, maximize social security

Reducing expenses trims the amount that retirees must take from their portfolios during bad markets. That’s why Melissa Sotudeh, a certified financial planner in Rockville, Maryland, recommends paying off debt before retirement.

She also suggests clients maximize Social Security checks. Benefits increase by about 5% to 8% for each year people put off starting Social Security after age 62. (Benefits max out at age 70.) The more guaranteed income people have, the less they may have to lean on their portfolios.


If needed, arrange more guaranteed income

Ideally, retirees would have enough guaranteed income from Social Security and pensions to cover all of their basic expenses, such as housing, food, utilities, transportation, taxes and insurance, says Wade Pfau, professor of retirement income at the American College of Financial Services. If they don’t, they may be able to create more guaranteed income using fixed annuities or reverse mortgages, says Pfau, author of “Safety-First Retirement Planning: An Integrated Approach for a Worry-Free Retirement.”

Fixed income annuities allow buyers to pay a lump sum to an insurance company, typically in exchange for monthly payments that can last a lifetime. Reverse mortgages give people age 62 and older access to their equity through lump sums, lines of credit or monthly payments, and the borrowed money doesn’t have to be paid back until the owner sells, dies or moves out.

Covering expenses with guaranteed income actually can free retirees to take more risk with their investment portfolios, which over time can give them better returns and more money to spend or leave to their kids, Pfau says.

“They’ll be able to invest more aggressively and still sleep at night because they don’t need that money to fund their day-to-day retirement expenses,” he says.

Consult an expert

A survey released in 2020 by the Schwab Center for Financial Research found that among near-retirees — people within five years of retirement — 72% worry they’ll outlive their money and 57% feel overwhelmed about determining how much they can spend. Yet most people don’t consult financial planners to make sure their investment, withdrawal and Social Security claiming strategies make sense.

Getting that second opinion, preferably from a fiduciary advisor committed to your best interests, is critical. Advisors use powerful software as well as knowledge gained from guiding many clients though retirement, says Rob Williams, the research center’s vice president of financial planning, retirement income and wealth management.

“We’ve done this thousands of times,” says Williams. “You only get one chance at it.”

Liz Weston is a columnist at NerdWallet, a certified financial planner and author of “Your Credit Score.”