7 Things Every Person with a Retirement Plan Needs To Know About a Bear Market

Bear markets are nerve-wracking for any investor, but they’re especially so for people who are either retired or moving closer to retirement. When you are older you have less time to recover from prolonged market downturns, which puts extra pressure on you to minimize losses and protect yourself financially.

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This doesn’t mean pulling out of stocks and shoving all your retirement money into savings accounts. But it does mean investing with an eye on short-term stability, balanced assets and reduced risk. It might also mean delaying retirement so you can contribute more to your retirement fund while the market corrects itself.

“For anyone retiring soon, a stock market sell-off is worse than it would be for younger investors,” William Parrott, president and chief executive officer of Parrott Wealth Management in Austin, Texas, said in a blog on the Mass Mutual website.

Following are some tips he and other experts recommend if you are nearing retirement or are already retired.

In bear markets, one of the first moves you should make is to rebalance your assets to maintain the right allocation of stocks, bonds and cash. This means reducing your exposure to volatile stocks and moving more money into stable assets like cash and bonds. You don’t want to get too conservative by parking all your assets in cash, Parrot said. But when choosing stocks, focus on quality companies with strong business fundamentals, healthy balance sheets, and steady earnings growth.

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Some financial planners recommend having at least two to three years’ worth of income set aside in liquid assets such as cash, cash equivalents and short-term bonds that you can access during market downturns.

Certified financial planner Craig Toberman, founder of Toberman Wealth in St. Louis, told CNN Business that he recommends moving five years’ worth of income into liquid assets during bear markets.Suppose you have a $1.25 million portfolio and aim to withdraw $50,000 a year in retirement. In this case, you would want to keep $250,000 of it in liquid assets. This strategy lets you draw cash during a bear market without having to sell stocks at a loss, Toberman said.

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In a recent column for AARP, financial author John Waggoner recommended that you avoid withdrawing money from stock funds during a bear market unless you have no other choice. The reason is that if you sell them at a low point, you leave yourself short of income to cover your losses.

“If your stock fund is down 15% and you withdraw 4%, your account will be down 19%,” Waggoner wrote. “Withdrawals in a bear market just make things worse.”

People who are close to retirement or already retired should consider adding Treasury Inflation-Protected Securities, or TIPS, to their portfolios, according to Amy Richardson, a certified financial planner with Schwab Intelligent Portfolios Premium. As she told CBS MoneyWatch, investors can buy TIPS directly through the Treasury Department or via their bank or broker. Just keep in mind that investors can only buy $10,000 worth of TIPS per year and per account, which limits the amount of inflation protection they can offer. 

It’s nearly impossible to accurately predict when stocks are at their top or bottom, even though a lot of amateur investors think they can pull it off – especially in a bear market. As CBS News reported, research shows that people who dump stocks during a market downturn are likely to miss the days when the market rises sharply, which hurts long-term returns. Similarly, if you buy the dip thinking a stock can’t sink any lower, you could sustain even bigger losses if the stock continues to fall.

This basically means taking a long-term view by continuing to contribute to your retirement funds during a bear market.

“I am a big believer in the adage that time in the market is more important than timing the market, and that means that any time you can set aside money to invest is a good time,” Richardson said. “If you have the ability to put more toward your 401(k) or other retirement accounts, this is as good a time as any.”

If you are nearing retirement, it’s usually not a good idea to stop working during a bear market. As Mass Mutual noted, continuing to work and earn a living serves a dual purpose: You can keep funneling money into your retirement account through catch-up contributions, and you can give your investment portfolio time to recover from the bear-market losses.

“If the majority of their income is coming from invested assets that have seen a significant loss, a delayed retirement may be necessary,” said Hiram Hernandez, a MassMutual financial professional with Coastal Wealth in Miami.

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