WHILE YOU HAD a job, it might have been unnerving when the stock market declined. But there was no immediate impact on your standard of living. You had a paycheck to cover your daily living expenses, so it wasn’t like you needed to sell stocks to buy groceries.
In fact, a market decline represented an opportunity. You could funnel part of your paycheck into stocks, thus taking advantage of the lower prices. Want to amass a healthy retirement nest egg? If you’re a rational investor who is unperturbed by market turmoil, you should hope for lousy returns while you are saving for retirement, followed by a huge bull market as you approach the day you will quit the workforce. That way, you would buy investments when they are cheap and sell when they’re expensive.
What if you aren’t so lucky, and you retire and get hit with a bear market? You aren’t saving regularly anymore, so tumbling markets no longer represent a great buying opportunity. True, you could take advantage of the decline by shifting some of your money from bonds to stocks. But instead of buying, you are far more likely to be selling as you seek to generate income.
Indeed, now that your human capital has stopped providing you with a paycheck, you’ll need your portfolio to play that role. That means designing a financial strategy that focuses less on growth and more on income—and which can limit the damage done by sinking markets.
Next: Your Retirement Income