It’s easy to ride out stock market highs and lows when you’re still working. After all, the common advice for managing your 401(k) in a down market is standard: Just wait it out. The average bear market — usually defined as a dip in securities of 20% or more from recent highs — lasts 389 calendar days from peak to trough, and then takes another two years to return to all-time highs. If you’re in your 40s or 50s, the best move is to take a deep breath, brew some herbal tea and be patient.
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But if you’re on the verge of retirement or already retired, you’ll need a different approach (or stronger tea!). You’re at the point where you need to start putting your money to work. Simply waiting a few years for the markets to go through their natural cycle might not be a possible option.
As such, using a more nuanced response to a bear market is necessary — one that neither results in costing you money through panicked selling, nor leaves you unable to enjoy your retirement the way you see fit. So, here’s a closer look at how you should approach a bear market as a retiree.
If You Are Close to Retirement
If you’re still working but haven’t retired yet, the main method for preparing for a bear market retirement is adjusting your asset allocation before stocks start to fall, namely, moving your money out of stocks and into bonds and cash. However, it’s not always easy to predict when a bear market is coming, and overtrading your portfolio can lead to even more catastrophic results. If you are still working, you have the two advantages of time and earnings on your side. First, you have time to ride out any downturns in the market and await a future recovery, and second, you are still earning and can invest in additional shares at lower prices if you do encounter a bear market.
Even if you take a hit in a bear market, there are some workarounds to ensure you’re still on track for retirement – even if some of them sound unpleasant. For starters, you can plan on working a few additional years. This strategy has the double benefit of earning you additional money and boosting your future Social Security payout.
Another option is to take some profits from portions of your asset allocation that may be up, such as your bonds, and reallocate some of that money into securities that are down – such as your stocks. Just be sure to talk to a financial advisor if you are leaning towards this option, as building a portfolio that is stock-heavy may increase your risk profile beyond your comfort level.
If You Have Recently Retired
If you have recently retired, don’t panic if your stock portfolio sells off in a bear market. You likely still have decades left in your retirement, and you should have time to enjoy a market recovery. Since retirement can last 30 years or more, it’s important that you keep some of your asset allocation in stocks so you can earn the long-term, inflation-beating returns of the market. However, if the bear market is too unsettling emotionally for you, you might consider lightening up your stock allocation once the bull market returns, just so you can still sleep at night the next time the bear rears its head.
One important thing to remember is that overreacting to a bear market could just make things worse. Since you’ve got many retirement years ahead of you, finding adjustments to your finances that don’t involve selling off stocks is ideal. That might mean cutting back on your spending, downsizing your home and leaning more heavily on your Social Security checks for a few years. Another option is to look for short-term ways to pick up extra income, such as consulting gigs in the industry you just left. Either way, making some smaller sacrifices now can help you avoid much bigger ones later on.
If You Have Been Retired for a While
Keeping the right mix of stocks and bonds in your portfolio will help you avoid having to worry too much about riding out a bear market, even deep in your retirement. Stocks offer the long-term growth potentially to handily outperform inflation, and bonds act as a less volatile, more secure buffer that may periodically trade down in price but that pay off their full price at maturity, reducing their risk for long-term holders.
The right balance of stocks and bonds will vary from investor to investor, so it’s important to speak with a financial advisor regarding your investment objectives and risk tolerance. Generally, the deeper you get into retirement, the less risk you want to take, as you’ll have less time to recover from a bear market. This is why it’s important to maximize the growth of your investments while you are still working and/or have just reached retirement age, as you’ll need the largest balance possible to sustain you as you reduce your risk and stock allocation as you get older.
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