Can you retire in a market downturn?

Key takeaways

• Market downturns are followed by rebounds, giving investments time to recover.
• A diversified portfolio, such as a target-date fund, is designed to weather market volatility and take advantage of the eventual recovery.
• Selling investments during a downturn can increase your risk of running out of money in retirement. A smart strategy for taking that money out can give your investments time to recover.

Dealing with market volatility

When approaching retirement, the challenge is how to protect the money you’ve accumulated while still making sure your investments continue to grow so you can make your savings last.

In a market downturn, that challenge may seem more daunting. Your instincts could be telling you to get out of the market to protect your savings; instead, such a move can lock in your losses and increase your risk of running out of money in retirement.

In times like these, it’s good to remember that markets eventually rebound. The right strategy can help you weather a period of volatility, position your investments to benefit from the recovery, and keep growing your savings during retirement.

It starts with your portfolio

Your portfolio—or collection of investments—needs to have some diversity to work well for you.  This just means that your money is invested in several areas, so if one is performing poorly, you still have other areas that could be performing well. Here’s why a well-diversified and actively managed portfolio is one of the most robust investment strategies for uncertain markets: 

• A diversified portfolio spreads investments across funds that have different risk/return profiles—from low risk/low returns to high risk/high returns—and react differently to market changes. This can help balance potential gains and losses.
• When these investments are actively managed, they can help take advantage of opportunities in a market downturn, such as buying shares at lower prices.

A ready-made, expertly managed portfolio such as a target-date fund is built for managing retirement risk in volatile markets. This is a fund made up of other funds with a strategy that focuses on when you expect to retire. With a mix of investments, some designed to grow your money and some designed to protect your money, it adjusts over time to be lower risk. It’s already well diversified and designed to grow your savings while protecting your money as you get closer to retirement. A target-date fund managed through retirement—or past your target retirement date—will have a mix designed to continue growing your savings even well into your retirement years.

Review your withdrawal strategy

Your retirement income will likely come from different sources. Before retiring, you’ll need to decide when and how to take that money out. A smart withdrawal strategy should give your investments time to recover from a market downturn, save on taxes, and help make your savings last. Here’s what you may consider for your strategy:

• Putting off using your registered retirement accounts—Keep in mind that you don’t need to convert your registered retirement accounts into income accounts until the end of the calendar year when you turn 71. If you put off withdrawing from those accounts, it should give your investments enough time to recover from a downturn before you start using that money. In the case of a Registered Retirement Savings Plan (RRSP), you can even continue contributing to it and taking advantage of compounding interest to grow your savings.
• Using tax-efficient sources—You’ll want your income withdrawal strategy to be tax efficient to allow you to retire into the lowest tax bracket possible. While withdrawals from your registered retirement savings are taxable, you may consider using the money from nontaxable or partially taxable sources, such as a tax-free savings account or nonregistered accounts.
• Using guaranteed sources—You can start using income sources that are less affected by the markets and offer income stability in market swings; for example, government pensions such as the Canada or Quebec Pension Plan or guaranteed investments.

A final thought

Long-term planning doesn’t stop once you retire. Remember that your retirement can last decades, and you might see more than one market downturn in that time. It makes sense to continue long-term planning amid short-term volatility, including regularly reviewing your investments to make sure they’re still on track and aligned to your goals.

Your financial advisor can help

A market downturn doesn’t need to derail your retirement plans. Work with your financial advisor on investment and withdrawal strategies that will let you retire, position your portfolio for the eventual market recovery, and make your savings last.