It is a longtime investor’s worst fear: retiring into a bear market.
A downturn in stocks can be a blessing in disguise when you are still working and saving for retirement, because you are able to buy shares “on sale.”
But such a downturn can have devastating long-term consequences once you are living off your retirement savings. Every dollar you withdraw from a diminished portfolio is money that will not be around for a later market recovery.
Research has shown that this scenario — known as sequence-of-return risk — can permanently reduce the amount of money you will have to live on during retirement.
However, smart retirees can avoid most or all of this damage. If you are planning to retire right into the teeth of a bear market, you should do the following things.
Meet with a financial professional
Retiring into a bear market is scary. Make the wrong decisions here, and it can have life-altering consequences. So, this is no time to fool around.
Perhaps you have spent years educating yourself and preparing a strategy for just this scenario. If so — and you are sure the plan is sound — now is the time to execute it.
But for many others, perhaps the vast majority, this is the perfect moment to speak with a financial adviser. The right pro can help you craft a plan to sail through retirement in a watertight vessel that survives today’s stormy seas.
Stop by Money Talks News’ Solutions Center to find a fee-only financial adviser.
Rein in your spending
Perhaps you had big dreams for retirement: a new home, endless travel, evenings sipping fine wines. But retiring into a bear market can mean a change of plans.
At least for now, downsize your grand visions. The more money you keep in your wallet when the market is down, the better off you’re likely to be when the bull market returns.
When the market recovers, you can pick up your dreams where you left them. But now is not the time to reach for the stars.
Turn to your savings
One of the best ways to avoid permanently scarring your finances in retirement is to have a pool of cash savings that you can draw on when stocks collapse.
Living off your liquid savings prevents you from having to cash in stocks when their value is depressed. That gives your portfolio time to recover.
If you have built a nice pile of cash, now might be the time to turn to it.
Weigh your Social Security options
Of all the things on this list, this might be the most challenging to get right. When retiring into a bear market, should you:
- Take Social Security now, so you can leave your investments alone and give them more time to recover?
- Delay Social Security, hoping that bigger checks later in retirement that will help cushion the blow if your other finances do not recover robustly?
There is no simple answer here. Many factors can help you determine which strategy is best, including your health, your risk tolerance, your marital status and many other considerations.
If you feel overwhelmed by all your options, visit Money Talks News’ Solutions Center to find low-cost Social Security help.
Revisit your asset allocation
Bear markets are the ultimate test of your tolerance for risk. It’s easy to be fully invested when stocks are flying high. But when the market takes a nosedive, all that courage suddenly feels like foolishness.
So, with stocks down at least 20% — the definition of a “bear market” — how do you feel?
Are you too anxious too sleep? Or, are you relatively relaxed, knowing you have enough money to tide yourself over and confident that markets eventually will recover?
The answers to such questions can help you determine if your asset allocation is too risky, too conservative or just right. Making sure your allocation matches your risk tolerance will put you in a better position for the next bear market.
Return to working
This is the last thing many retirees want to hear. But sometimes, the best bits of advice are the toughest.
Yes, you likely retired because you planned to avoid work for the rest of your life. But remember the principle of short-term pain for long-term gain. Bear markets rarely last long, often disappearing in less than a year.
A part-time job or freelance work can give you extra income to ride out the storm, possibly even allowing you to leave all of your savings untouched.
When the market recovers, you can return to your favorite full-time career: retirement.
Make no mistake, retiring into a bear market is a challenge. But it’s not the end of the world.
The tendency to panic is among your biggest enemies in such a situation. During the Great Recession of 2007-2009, millions of retirees saw their retirement portfolios decimated, some by 50% or more. Many of these folks found those losses so painful that they pulled much or all of their money out of the stock market, vowing never to return.
Anyone who has looked at stock returns since the market low of March 2009 knows how that worked out. (Spoiler alert: It didn’t work out well.)
Don’t let fear cloud your judgment. This, too, shall pass, and likely more quickly than you expect. There are steps to take — many of them are on this list — but you should not do anything rash.