Christine Benz of Morningstar.

In bearish markets like today’s, younger investors can just “stand pat,” because by the time they retire, most likely the market will have recovered, and then some.

But older investors may not be able to do so, writes Christine Benz, Morningstar’s director of personal finance, in her column, “A Down-Market Survival Guide for Retirees.”  She notes that “spending from an equity-heavy portfolio that’s simultaneously declining means there will be fewer assets in place to recover when stocks finally do. Taking too-high withdrawals from a declining portfolio could permanently impair your portfolio’s long-run sustainability, especially if those withdrawals occur early in your retirement.”

To avoid the psychological as well as money issues of this kind of move, here’s what she recommends:

1. Check the client’s liquid reserves.

How much cash do they have on hand? Benz recommends that two years’ worth of liquid investments in a portfolio is just about right. That means money in mutual funds, CDs, online savings accounts or even checking and savings accounts.

2. Re-evaluate your client’s long-term asset allocation.

Many clients won’t have two years’ worth of cash holdings, and if not, you should check their portfolio’s long-term asset allocation mix. Some allocations might have shifted over the years and need to be rebalanced.

Also check their intra-asset class positioning, Benz says, to see how much was held in small-cap and value-leaning names as well as foreign stocks. It could mean their portfolio is underexposed in areas, she says, that could perform well in the next 10 years.

Finally, keep in mind tax issues while repositioning; “making adjustments in [their] tax-sheltered accounts is usually a good starting point.” If the client has to take required minimum distributions or even is in need of cash for next few years, she says “consider trimming appreciated portions of the portfolio.”

3. Revisit withdrawal rate.

The advice is simply, loosen your belt in strong markets, and tighten it in weak markets. Benz notes, “the basic premise behind reducing your spending in weak markets is that [they’ll] leave more of the portfolio in place to heal when the market improves.”

She suggests that clients be more conservative in withdrawing cash early in retirement and points to research from a colleague finding that RMDs “nicely align retirees’ withdrawals with their ages and portfolio balances.”

4. Identify tax-saving opportunities.

The good news is there might be tax savings during weak markets, Benz states. For example, selling depressed securities from [a] taxable account is the most “obvious tactic to consider,” she says.

If invested in individual stocks, “use the specific share identification method for calculating cost basis, and/or purchased shares when the market was loftier” and you might find stocks  currently trading below what the client paid for them. Also:

  • You can sell and use the losses to offset capital gains elsewhere or as ordinary income of up to $3,000.
  • Unused losses also can be carried forward into future tax years. However, she warns, those “substantially identical” security can’t be rebought within 30 days without disqualifying a tax loss.
  • Convert all or part of a traditional IRA balance into a Roth IRA, which during a weak market could reduce a client’s “conversion related tax bill,” she says.

5. Find other ways to trim investment-related costs.

Begin by looking at all-in investment-related expenses, such as fund expense ratios, she writes. During a bull market the higher costs might have been justified, but now not so much. She notes that index funds and ETFs are the “cheapest of the cheap.” Also, to keep brokerage commissions down (if your client’s brokerage still charges for trades), keep trading to a minimum.

6. Step away from the action.

Make sure you work with clients not to obsess about the markets’ daily moves, and that they keep their long-term retirement plan in mind.

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