What If a Bear Market Occurs During Retirement?

The question isn’t really what if a bear market occurs during retirement.

The question is what to do when a bear market happens during retirement if you invest in stocks.

This is true because bear markets are a fact of life for stock market investors.

This means that any retiree invested in the stock market for more than only a few years will be investing during a bear market.

This phenomenon is so problematic for retirees that studies have been done to measure the extent of damage that’s done when bear markets occur during retirement. There’s even a name for this little known but dangerous retirement related risk: sequence of returns risk.

Keep reading to learn:

  • What happens when a bear market occurs during retirement
  • When bear markets present the most risk for retirees
  • 2 methods to mitigate bear market risk in retirement
  • How I personally manage bear market risk in retirement

Let’s get started.

How Do Bear Markets Affect Retirement Withdrawal Plans?

Sequence of returns risk is the risk an investor faces from portfolio losses happening in the wrong order, particularly in the years shortly before or after retirement. Such losses pose a very serious risk for those planning to live off retirement withdrawals from their investment accounts, in particular.

A retiree’s plan can be completely blown when a bear market causes portfolio losses during the crucial time just before or just after retirement.

The declines in the account are bad enough, but making retirement withdrawals during stock declines makes the losses even worse.

Bear Markets Right After Retirement

Bear markets don’t usually happen 3 years in a row as in the data presented below, but this doesn’t mean this scenario can’t happen.

The chart below from Baird Financial Advisors demonstrates what happens when bear markets occur in the first 3 years of retirement vs bear markets occurring later in retirement.

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Source: Baird Wealth Management

Mr. Brown and Mr. Green both began retirement with a $1,000,000 portfolio with generous 5% withdrawals starting in year 1 at age 65.

Like all investors, they each experienced portfolio losses during some years.

The problem was the timing of the losses, however, as both men had positive and negative investment returns from age 66 until age 90. The order of those positive and negative investment returns resulted in Mr. Brown running out of money at age 83 while Mr. Green had over $2, 517,000 at age 90 when the order of the investment returns was flipped.

Mr. Green’s portfolio had one negative return year of 5% in the first 11 years of retirement. His portfolio had positive returns in the other years during the first 11 years in retirement withdrawals.

Mr. Brown’s portfolio had negative returns in the first 3 years of retirement because he retired going into a period where his portfolio was negatively affected by stock bear markets.

Note that since retirement withdrawals are adjusted for inflation each year, high inflation coupled with sequence of returns risk can be particularly risky for retirees whose portfolios aren’t prepared for bear markets and other challenges.

How to Avoid Bear Markets Early in Retirement

Seeing the damage bear markets do to retirement plans leads smart retirees to seek ways to avoid bear markets.

It’s worth repeating that bear markets are a fact of life for stock market investors. No one can know if the stock market will go up or down for sure at any given time, but there are some ways to mitigate stock market losses from bear markets.

Strategic Investing to Manage Bear Markets in Retirement

Investors who adhere to a strict asset allocation by buying and holding stocks, bonds, and other asset classes in fixed percentages rely on the potential for defensive assets like bonds and cash to offset stock market losses. This risk management method is known as strategic investing. It can work quite well for disciplined investors who avoid emotional investing and investors who use financial advisors to adhere to chosen asset class allocations.

Tactical Investing to Manage Bear Markets in Retirement

On the other hand, more advanced investors and many financial advisors rotate out of stocks as bear markets develop, thereby lessening the damage from them. These funds are rotated into defensive asset classes expected to do well during bear markets.

One of my favorite methods for implementing a tactical portfolio is through the Allocate Smartly platform which I personally use.




Image for Retirement Withdrawals in Bear Markets Chart

The information on this website is for education only and is not to be construed as personal financial advice.