Retiring During a Bear Market

By Jane Young, CFP, EA

If you are on the verge of retiring or have retired in the last few years, the stock market undoubtedly has you concerned. Since the beginning of the year, the stock market has dropped by more than 20% and is likely to drop more when the Federal Reserve increases interest rates again. Rising inflation and the subsequent rise in interest rates has been the primary cause for the drop in both the stock and bond market.

Retiring during a bear market, defined by a 20% drop in the stock market, is obviously not ideal. Tumultuous and unpredictable movements in the market are scary but the stock market will eventually recover and continue growing. Bear markets are normal, they occur once every 3.5 years, with an average decline of 35.6%, and last an average of 289 days. If you are still working and have some flexibility, you may want to postpone your retirement a couple of years.

Once you reach retirement, be sure to have a financial plan. Most plans call for a reasonable allocation of stable assets, to be held in your portfolio. A typical retirement allocation is 40% in stable/fixed income assets and 60% in equities. Stable assets include cash, certificates of deposit and short-term bond funds. At the very least, your plan should include at least five years of net expenses in stable/liquid assets. During a bear market, use your stable assets to cover your living expenses. Do not take distributions from the stock market while it is undervalued.

It is reasonable to feel anxious and be tempted to sell during a bear market. Be patient and use your financial plan as a foundation to stay on track. You may be in retirement for two to three decades. If you panic and sell when the market is down, you lock in losses and will be out of the market when it rebounds. This is detrimental to your long-term plan and could result in outliving your money.

To help safeguard your retirement portfolio cut back on spending during a bear market. Track your spending for a few months and look for opportunities to reduce expenses. Also consider postponing major expenses such as new vehicles, remodeling projects and major vacations until the market improves.

Research by Vanguard found that the adverse effects of a bear market, also know as “sequence-of-return” risk, during retirement could be mitigated with an adaptive withdrawal strategy. You can offset a decline in portfolio value with an incremental decrease in planned withdrawal amounts over a short period of time. They found that even in the worst bear markets, risk to your portfolio could be eliminated by reducing retirement distributions by 5% in the first five years.

If decreasing your expenses by 5% is not viable consider working part-time to reduce your retirement distributions. Unlike many previous bear markets, the current labor market is relatively strong.