How to Generate Retirement Income in Down Markets

If you’re retired or about to retire, witnessing the steepest stock market decline since 1987 is unnerving. And that’s just one way the coronavirus has impacted our lives this year. Still, for many people selling stocks and collecting dividends is a key component of their retirement income. So, how do you generate the same amount of income in retirement after stocks fall so sharply?

If you have a well-constructed financial plan, the answer is simple: You stop selling stocks (above and beyond what’s necessary to rebalance your holdings or to meet your RMD – note that you are not required to take an RMD in 2020).


Markets rise and fall over time. That’s why a financial plan includes stocks for growth, but also includes income sources that are largely unaffected by markets (pensions, annuities, Social Security, cash value life insurance and a cash reserve). Diversifying your sources of income is key to making sure that you can continue to generate income without having to worry about what’s happening in the market. When stocks fall, you’re able to lean on income that isn’t affected by the downturn. That’s because selling stocks after they decline in value will lock in losses — you will likely need to sell more shares to generate the same amount of income. That reduces the size of your stake in a company or fund, and it may also lower your overall dividend and interest income.

Instead of selling stocks, you could use your cash reserve, or access cash value1 in a whole life insurance policy for to help supplement your income. That can give markets time to recover, allowing you to sell at better prices later.


If you’re not able to access more stable funds, or don’t have enough in those accounts to cover your needs, that’s ok. There may be other ways to access funds without selling your investments. First, clearly you can reduce your expenses to make up for any income reductions associated with a market decline.

Then, you could tap a home equity loan or line of credit (HELOC) or personal loans to replace your market-based income sources for a while. The Federal Reserve recently dropped interest rates to historically levels near zero, as well. That significantly reduced the interest rates on loans of all types. While it may not be your top choice, you may be able to get a competitive low rate on a personal loan or line of credit. Just make sure that if you take a loan you have a clear strategy to repay the loan to avoid getting stuck in debt.


Once the market recovers, if you’re concerned about generating income during the next downturn, there are several options you may want to consider:

Build up a cash reserve: It’s typically a good idea to include two years' worth of cash in reserve. That’s money that you can access during downturns so that you don’t have to sell stocks at an inopportune time. Only replenish your reserve when markets go higher.

Consider an annuity: An income annuity can allow you to take a portion of your investments and guarantee income that won’t be affected by the markets. That way, the next time there’s a downturn you won’t have to be worried about that portion of your income. The checks will keep coming right on schedule.


Here’s the bottom line: When the market falls, you have options. But every person’s financial situation is a little different. It’s a good idea to have a discussion with a financial advisor to ensure you don’t overlook any of the options you have on the table. 

1Each method of utilizing your policy's cash value has advantages and disadvantages and is subject to different tax consequences. Surrenders of, withdrawals from and loans against a policy will reduce the policy's cash surrender value and death benefit and may also affect any dividends paid on the policy. Loans taken against a life insurance policy can have adverse effects, including tax liability, if not managed properly. Policyowners should consult with their tax advisors about the potential impact of any surrenders, withdrawals or loans.

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