Iowa Fiduciary

Retirement Planning in a Bear Market

Bear markets are nerve-wracking for any investor, but especially for retirees or those close to retirement. Making the right moves with your investments and retirement plan is key when the stock market is in free fall like it has been. Here’s how to stand up to a bear market as we navigate this volatile time.

The market has not been the best for investors. The S&P 500 — a benchmark index commonly used to measure how the stock market overall is doing — fell into a bear market, meaning that its value dropped at least 20% from its previous high. And recent retirees or people who are planning to retire in a year or two are feeling the sting.

Retiring into bear marketing can be difficult on your financial wellbeing and your financial portfolio. But a bear market offers young investors the opportunity to get into the stock market at something of a discount. It might be anxiety-inducing at times, but the results can be fruitful if done correctly. Rather than fall into despair or make impulsive decisions, here is how to help lessen the negative effects on retiring in a bear market.

Strengthen Your Liquid Reserves

The market is down, and you’re concerned about how that might affect your retirement portfolio. As you near retirement, your cash reserves need to be as high as possible. This is especially true if you haven’t retired quite yet and are still taking care of yourself financially.

A recent study conducted by Vanguard estimates that entering retirement during a bear market with a balanced portfolio and relying on that portfolio for 100% of your income, while making withdrawals when stocks are down, could increase the chance you outlive your money by 31% and reduce your income stream by 11%.

Some planners recommend at least two to three years’ worth of income set aside in liquid assets such as cash or cash equivalents and short-term bonds to draw from during market downturns. These funds should be used to cover living expenses, which can be reduced if necessary during lean times.

Reduce Spending

To bolster your cash reserves further, take a hard look at your current spending and see what you can cut. This can be an especially helpful exercise if you’re still working, since it will help you get a better idea of how much money you have left over after paying for necessities like rent, utilities and food.

If you’re already retired and are worried about your finances, there are ways to help keep you from going into debt. The first step is to track your current spending and distinguish which expenses are needs vs. wants. And cut back on some of the discretionary items.

Small daily habits like freezing credit cards, having no-spend days, getting better subscriptions deals (or canceling them) and planning free activities are a great start. Reassess plans for large expenses too. If necessary, consider more aggressive moves like downsizing your home, reevaluating those lavish vacations, taking up a part time job (the labor market is tight, which means there’s an abundance of jobs) and even part ways with your additional car or second home. 

If you’re already retired, it’s especially important to take steps to help lighten your dependence on your portfolio. 

Rebalancing Act

In bear markets, one move to make is to periodically rebalance your assets to help stay within your designated allocation.

Portfolio management begins by establishing appropriate allocations for equity, fixed income, and cash, which are determined based on your financial goals, risk tolerance, time-horizon, and current and future demands on capital. Portfolio rebalancing is buying and selling portions of your portfolio to set the weight of each asset class back to its original set allocation.  This is essential for helping to balance the risk you’re taking with the long-term return potential of your investments. Meet with your Fiduciary on a regular schedule to assess and make amendments as you go.

Investment Opportunities

Another side to market volatility is the opportunities it presents. It’s a great opportunity, when the market is down, to be able to get in and start the process. That means if you’re brand new to investing, now is a potentially beneficial time to start building wealth via the financial markets.

While financial advisors recommend not trying to time the market, it could make sense to buy when prices are low — and prices right now are certainly low. In other words, think of the bear market stock prices as your favorite store on sale. You’re essentially getting them at large discounts – which could make sense for your future investing goals. It’s also worth noting if you invest both in and across asset classes, you have a better chance of weathering challenging market environments.

Be Prepared for Changes

A good retirement plan should reflect change whenever you’re met with one of life’s many obstacles. Retirement isn’t always linear or predictable, and as such we should be prepared for when it happens. Perhaps you change your mind on where or how you want to live. Or a medical crisis occurs that will alter your financial plans.

Ultimately, your portfolio serves your goals as they evolve. When they do evolve, you will need to review your drawdown strategy. When this happens, it may just be as simple as adjusting your withdrawals. For example, if expenses change or your portfolio takes a big hit during the bear market. Other examples of change include when you want to retire. If you had your heart set on walking out of those office doors for a final time this year, it can be hard to convince yourself to stick it out for a bit more time. But doing so could really help you financially in the long term.

Financial calculators are great tools and resources for predicting future financial shortfalls. 401(k) or IRA calculators can help you gut check your chances of not running out of money given the variables you enter. These calculators can help you paint a better picture of what your retirement might have in store. Explore our free online calculators here to get started.

Final Thoughts

It’s important to remember that bear markets are not unusual or permanent. They also don’t always lead to recessions, especially if they last less than two years. If you’re planning to retire in the next year or two, maybe hold off on giving notice until there’s more clarity around whether there will be a recession. The economy is still strong and unemployment is low, but that doesn’t mean we won’t see a recession in the near future. 

Are you currently looking for a Fiduciary financial advisor in Iowa to help you navigate a bear market the right way? You can trust that our advisors will always put your needs ahead of their own. It’s our legal obligation to you as Fiduciaries, but it’s also simply the right thing to do. Contact us here today to start the conversation.

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