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How to Retire into a Bear Market


With millions of Americans depending on 401(k) and IRA assets for their retirement income, a market downturn can wipe out decades of investment in a single go. And while young workers at least have the time to rebuild their savings after a bear market, it can be a disaster for people on the verge of retirement who were planning on living off the assets in their portfolios.

It doesn’t have to be, though. With proper management, retiring into a bear market does not have to define your financial future. If this is you, consider taking these few basic steps.

A financial advisor can help you create a financial plan for your investment needs and goals. 

Avoid Selling Stocks

Whatever you do, try to avoid selling equities.

During a bear market, an investor could be forgiven for believing that these declines were irreversible. It would be understandable to want to liquidate stocks and keep whatever you can.

But from mid-March until June 1, the Dow Jones Industrial Average had almost returned to its mid-February high. It gave up some of those gains during June, but by mid-July the Dow had resumed climbing and was only about four percentage points shy of its June 1 closing. Meanwhile, the tech-heavy Nasdaq Composite set an all-time record high on July 9.

Similar rebounds occurred in the past. By 2013 the stock market had recovered all of the value lost four years earlier to the Great Recession. Investors who held their positions generally recovered all of their losses and then some. By contrast, investors who sell during a market downturn miss the chance to participate in a subsequent recovery. Not only that, but you will have to sell more stock to net the same amount of money, reducing the value of your portfolio further.

If at all possible, do not sell equities.

Adjust Spending

This may seem obvious, but it can be very useful to adjust your spending in the near term.

According to one analysis by T. Rowe Price, withdrawing no more than approximately 4% of your retirement account per year can help it survive a bear market. This is, of course, a variable amount. You will need to judge based on your own needs and the state of the market. However, this is a good place to start, and if you can reduce your spending and lifestyle needs to meet a withdrawal rate of 4% or less, it can help your portfolio weather the storm.

Spend Stable Assets, Protect Income-Generating Assets

SmartAsset: How to Retire into a Bear Market

By the time you enter retirement, your portfolio should be heavily weighted toward stable assets such as cash, bonds and income-generating investments. Typically, financial advisors recommend that your portfolio be weighted with approximately 50% to 60% stable assets and 40% to  50% equities at this point. Some particularly conservative financial advisors recommend up to 70% stable assets, but at some point too much of a portfolio devoted to income generation could weaken your investment’s ability to grow enough to keep up with your needs.

During a bear market, these are the first assets you should draw down on. In particular, a market downturn that occurs during a recession can result in bonds maintaining their value as investors seek a safe place for their money. As a result, these are investments you can sell for a minimal loss while the rest of your portfolio recovers.

Income-generating investments such as bonds, certificates of deposit, dividend-generating mutual funds and life insurance products like annuities are also likely to hold their value, although you should be careful before liquidating them. These are one of the most reliable segments of your portfolio over the long term. They tend to resist bear markets, making their payments regardless of market conditions. (This is not a hard and fast rule. Some bonds fall through, some contracts can too, but most will not.) This is a significant reason why those assets tend to maintain their value, but also a good reason not to sell them.

Rebalance Your Portfolio Towards Essential Spending

This is a spending and asset management strategy in which you define your spending according to the asset classes in your portfolio and vice versa.

As you manage your portfolio in retirement, segment your expenses according to how you spend for needs and lifestyle. Your needs are the basics such as housing costs, utilities, health care, food, bills and other expenses. Everything else falls into your lifestyle. This is the spending that you can sacrifice such as travel and entertainment.

To the degree possible, invest and draw down your essential expenses from the stable asset section of your portfolio. Take this money from your bonds, annuities, income-generating investments and other assets that generally weather a market downturn quite well. Rebalance your portfolio so that your asset mix matches this budgetary mix as well. That is, if your budget requires 70% of spending as essential spending, then rebalance your portfolio to have the same percentage of stable investments.

Manage your non-essential, lifestyle expenses through the equities section of your portfolio. If your stocks begin doing well enough to sell without a loss, then you can use money from this section and take that trip to Paris. While the market remains down, you’ll leave those equities alone and wait on non-essential spending until a little later.

Consider Social Security Benefits

Social Security is a difficult question for retirees during a bear market.

You can maximize your benefits under this program by delaying when you begin to collect on Social Security payments. If you wait until age 70 to begin collecting benefits the government will pay you significantly more than if you begin collecting at the earliest opportunity (age 62). For retirees with the cash to supplement their investments, then, this is often a wise decision. By spending more money now, you can supplement a retirement portfolio which has taken a beating through larger Social Security payments down the line.

Of course this may not be an option for everybody. Retirees who cannot afford to wait for Social Security benefits, or who would have to liquidate potentially valuable investments in order to do so, may want to begin collecting benefits soon. It depends entirely on your specific position but, if you can wait, it is worth doing so.

Invest in Equities if Possible

SmartAsset: How to Retire into a Bear Market

This is a counter-intuitive piece of advice, but it is true nonetheless.

Market downturns are sometimes an excellent time to buy stocks as they are often available at a discount. This is not to suggest that you should spend money that you don’t have, nor should you necessarily rebalance your portfolio towards stocks. There is always the risk that after you have bought shares in a bear market, they can decline even more.

You also shouldn’t take this time to invent new investing strategies, but rather add money according to the equity strategies you already employ. If you are invested in stock-oriented mutual funds, buy more shares. If you have exchanged-traded funds, do the same thing.

Bottom Line

Retiring into a bear market can be scary, but it can be successfully done. Maximize the value of your stable assets such as bonds and income-generating investments and do whatever you can to hold on to your equities while they’re undervalued. Limit your spending and – if possible – wait it out because, ultimately, this too shall pass.

Tips for Retirement Planning

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