Why Bear Markets Make for Tough Retirement Choices

Why Bear Markets Make for Tough Retirement Choices

The word ‘recession’ has been swirling around for a few years, with the general consensus from economists being that the US is heading for a downturn – although hopefully not as long or entrenched as the 18-month 2008 global financial crisis.

For consumers, investors and businesses, recessions come with some pretty big implications. Since confidence in the market takes a knock, economic activity drops off, consumers spend less and companies feel the pain in their bottom line.

The whole cycle conspires to make people, and businesses, more risk averse – which is why gold and bonds tend to do best among asset classes during recessions. The stock market, meanwhile, goes into hibernation.

Negative Sentiment and Your Financial Future

The ‘bear market’ associated with recessions – in contrast to the bullish and booming ‘bull market’ of plentiful days – is a response by the market to the negative sentiment swirling around and to the expectation that company profits, cash flow and appetite for acquisitions will decrease.

Since bear markets can last anything from a few weeks or months, to several years or decades, they can have a profound impact on how investors consider asset class diversification and when to make important life changes, such as going into retirement.

In a risk-off environment, where investors are worried about the future and become risk averse, making rash decisions can prove extremely detrimental to long-term financial health. So, it is during times like these that sitting with a trusted financial advisor is critically important.

Since many of my clients are retired or knocking on the door of retirement, one of the questions I’m asked most frequently at the moment is whether it’s a good idea to retire as planned or wait out the bear market downturn.

Bear Markets and Tough Retirement Choices

I prefer to approach each client’s situation based on its merits, and the specific needs of the person behind the portfolio. These personal requirements must be considered hand-in-hand with the sequence risks associated with the withdrawal – or decumulation – phase of retirement planning, which speak to when and how you begin to liquidate your retirement funds without negatively impacting the whole pie.

Logic tells us that starting drawdowns during poor market conditions can impact retirement savings in the long term if the process hasn’t been well thought through.

Research bears this out. For instance, the personal finance team at SmartAsset did a study earlier this year in which they found that delaying retirement by one year during the 2008 bear market would save a potential retiree almost $100,000.

A similar exercise based on a three-year delay during the 2011 bear market, ensured upwards of $830,000 remained in our fictional retiree’s pocket. I think you’ll agree, these are not insignificant amounts.

Similarly, a 2020 Vanguard study estimated that retirees depending completely on their financial portfolio for income, who retire during bear markets, were “31% more likely to outlive their wealth, had 11% lower retirement income streams, and left 37% smaller bequests”. So, the impacts are very real.

What Are Your Options?

When you rely on your accumulated savings to provide for your lifestyle in your golden years, this is a significant loss to carry. Therefore, every step must be considered carefully, from how you structure your retirement planning upfront to the need for flexibility during challenging market periods. You also need to consider the possibility of working for longer or striving to accumulate a large cash cushion to help you ride out stock downturns.

The biggest decision, of course, is whether you can wait to start your retirement. Again, whichever choice you make, there are options on the table.

Option 1: If You Can’t Delay Retirement

If you absolutely cannot delay retirement, even by a year, then a conservative withdrawal approach is really your best bet. As a recent study by T.Rowe Price noted: “By following a conservative withdrawal approach early in retirement and planning for temporary adjustments along the way (if needed), retirees can weather the markets and have a truly fulfilling and enjoyable next phase of life.”

As history shows us, the markets are dynamic and ever changing, so bear markets will inevitably morph into bull markets. You just need to give it time. If you stick to a conservative drawdown strategy as you enter retirement, it is extremely likely that your portfolio will recover when the winds change.

Getting the balance right at your entry point – especially if you are also dealing with a challenging economic environment – is crucial though, which is why I suggest getting solid financial advice. It’s also important not to panic and pull out of carefully selected stocks because they are low; remember markets recover and time in the market beats trying to time the market.

Option 2: If You Can Hold Off Retiring

Giving portfolios time to recover from a downswing is a luxury which those who are still years from retirement certainly enjoy, but this is not the case if you are due to retire shortly or have just gone into retirement.

Not every retiree has the luxury of being able to delay retirement. However, if you can keep working or rely on cash savings for a year or so, then do so.

For those who can’t, there are other strategies you can use, such as changing the source of your withdrawals to come from cash or bonds, rather than stocks. The reason for this, explains CNBC’s Greg Iacurci, is that “stocks serve as a long-term growth engine, helping to beat inflation’s negative impact over decades of retirement in a way that cash and bonds generally can’t.” So, drawing too much from stocks during a bear market, can have negative long-term implications for your portfolio.

Another option is simply to withdraw less, opting perhaps for 2% rather than the full 4%.

Need Some Help?

If you are looking for retirement help in Kansas City, not from a big impersonal firm but from a hands-on financial advisor who works for you and in your best interests, then give me a call or send me an email.

If you don’t call Missouri, but like your financial advice served with a healthy dose of straight talk from one of Kansas City’s top investment advisors, then we can connect virtually, too.

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