Bear Market Moves for Retirees

Once you’ve switched gears from retirement saver to retirement spender, dealing with bear markets requires a fresh approach.

Written by Carla Fried / May 23, 2022

Quick Bites

  • Watching stocks drop 20% or more can feel extra scary when you are retired and living off your savings.
  • Yet you still likely need to keep owning stocks in retirement to deal with inflation.
  • Hatching a plan that gives you the leeway to not touch your stocks in bear markets is key.

If you’re nearing retirement, you likely are a seasoned bear-market survivor. There have been five periods over the past 35 years when the S&P 500 stock index lost at least 20%, according to CFRA research. Not to mention the recent stock market ups and downs we’ve been seeing.

But you no doubt learned long ago that patience is one of the best ways to deal with bear markets. Despite those five bear markets, the average annualized return for the S&P 500 stock index for the past 35 years is more than 10%.

But things change, a lot, when retirement nears.

“After you’ve spent decades saving, saving and saving, it can be terrifying to now have to take that money out,” says Certified Financial Planner Keith Barberis, of Steward Partners. And making that transition in or near a bear market increases the stress.

For starters, you want to make sure that if a bear market happens early in your retirement you won’t have to sell stocks. Pulling money from depressed stock portfolios in the first few years of retirement can severely reduce the number of years your stock portfolio will be able to support you.

Yet you likely still need to own stocks to deal with the lurking danger of inflation. Land at age 65 in average health and there’s a good probability you will still be alive past age 85.

Even at a somewhat mellow 3% annual rate, what costs $100 today will cost more than double that in 25 years. Historically stocks have generated the best long-term, inflation-beating gains.

Here are some strategies for making sure you, and your investment portfolio, will be able to weather the inevitable bear markets in retirement.

Inside this article

  1. Expect lower returns
  2. Leave stocks alone for 4 years
  3. Fine-tune your bond approach
  4. Cover your essential costs
  5. Consider working with a pro

Assume lower portfolio returns for the next decade

Anyone nearing retirement today faces a double whammy of investment risks. Stocks (essential for long-term inflation-beating growth) and bonds (essential for ballast when stocks are in a bear market) are expected to post lower returns over the next decade given current headwinds.

Stock valuations are high, suggesting future returns may be lower. At the same time, bonds are going through a difficult phase where interest rates are rising after nearly 15 years of Federal Reserve policy helping to keep yields low.

While over time, rising interest rates are good for bonds—higher interest rates means more income—as a bond’s yield rises its price falls. The combination of those two pieces is your total return. And right now falling bond prices have been bigger than rising yields. Over the past year, core bond funds—the typical bond investment in 401(k)s—have a total return of -7%.

The prospect of lower portfolio returns has some experts suggesting the 4% rule of thumb for retirement withdrawals might be too generous. That rule is based on research that shows if you start retirement taking out 4% of a diversified portfolio and then adjust that amount each year for inflation, there’s a very strong likelihood the money will last you at least 30 years.

Recently, investment research firm Morningstar said a 3.3% rate might be a better target.[1] And 3.3% was at the high end of what Vanguard suggests might be the right target for current retirees.[2]

If you will sleep better knowing you are taking a conservative approach to withdrawals, consider running your portfolio through a retirement income calculator to see how much income a 3.3% initial withdrawal rate could generate for you. Your 401(k) plan provider or IRA brokerage likely have free retirement income calculators.

If the estimates are not as much as you need, and you’ve still got a few years until you retire, you could double down on saving more. If you are at least 50 years old in 2022, you can contribute up to $27,000 in a 401(k) and $7,000 in an Individual Retirement Account (IRA).

You might also want to consider the spending side of things. Downsizing sooner rather than later could reduce your housing costs ASAP, which in turn might give you more money to shovel into retirement accounts.

Give yourself the ability to leave your stocks untouched for four or more years

The biggest investment problem you face in retirement is known as sequence of return risk.

This is the problem of starting your retirement during a bear market and then needing to pull money out of your stock investments when those stocks are down. When you do that, you run the risk of depleting your portfolio much faster.

Here’s an example: Let’s assume two people are 65 years old. Both have $1 million. Over the next 25 years they each earn an annualized return of 6%, and are taking annual distributions.

So far so good. But how they get to that 6% is wildly different. One person has the good experience of positive stock returns in the early years and some really bad years at the end. At age 90 he ends up with more than double what he started with, even after making hefty annual withdrawals along the way.

The Unlucky Person has the opposite experience—his portfolio starts in negative territory and then posts positive returns in later years. He runs out of money by age 83.[3]

Again: same exact average annualized return, but the sequence of the returns killed Unlucky Person.

There’s a way to mitigate this risk: Make sure you have enough money in cash or bonds so that when a bear market hits, you don’t have to touch your depressed stock portfolio, and can give it time to recover.

Certified Financial Planner Scott Newhouse of Forthright Finances suggests a two-step approach. Have an emergency fund that can cover one to two years of living costs tucked into a safe bank savings account. Then focus on the bond side of your investment accounts.

“Look at how many years of living expenses your bond portfolio can cover,” recommends Newhouse. For example, if you have 30% of your portfolio in bonds, and you want to withdraw 4% a year from your investment portfolio, the bond side could likely cover your needed income for more than seven years (4 x 7 = 28). If your bond stake is larger, that will extend the number of years you won’t need to touch your stocks.

Tip: How long is enough? According to investment research firm CFRA, since 1929 it has taken stocks an average of less than four years to recover from bear markets. In the roughest bear markets, the recovery time was nearly eight years.

Fine-tune your bond approach

As mentioned earlier, core bond funds are having a tough time of it right now. That’s because the index these funds tend to track—the Bloomberg Barclays Aggregate Index—owns a lot of longer-term bonds, which are more sensitive to changes in interest rates.

That’s not a reason to bail on bonds.

“Stocks are your investment castle. Bonds are your moat,” says Newhouse. “In retirement your moat is all the more important.”

But given the current volatility caused by rising interest rates, you might want to rejigger how your moat is built.

Duration is a bond concept worth knowing. This is a measure of how sensitive a bond fund is to changes in interest rates. Duration is expressed in years. The longer a bond fund’s duration, the bigger its price declines when interest rates rise.

A core bond index—the type of bonds most 401(k) plans offer—currently has a duration of 6.8 years. That means that for every 1 percentage point increase in interest rates, the price of this bond index will fall approximately 6.8%. (The reverse is also true: For every 1 percentage point decrease in interest rates, the price would rise 6.8%. But right now, your headache is rising rates, and thus falling prices.)

Barberis suggests “shortening” your bond portfolio’s duration by shifting some of your bond money into funds that are less sensitive to rising rates. For instance, short-term bond funds typically have an average duration of less than three years.

Owning bonds with a shorter duration means accepting lower yields. That may be a trade-off worth considering.

“When you’re getting close to retirement, you want to make sure that you’re minimizing your downside. The goal is to manage to your risk, not maximize returns,” says Barberis.

He also recommends checking if your 401(k) offers a stable value fund. These are offered only inside workplace retirement accounts. A stable value fund aims to deliver higher returns than cash, without losing value when rates change. An index of stable value funds has gained more than 1.5% over the past 12 months, which is a lot better than the 3.8% average loss for short-term funds and the sub 1% gain for money market accounts.

Think about how to cover essential costs without touching stocks

While stocks are a necessary tool to combat inflation over what may be a decades-long retirement, another priority is “making sure you can put your head on the pillow and sleep well,” says Barberis.

That’s where a guaranteed income strategy can be useful.

Guaranteed income is a steady payment you can count on in retirement, no matter what is going on in the markets. Social Security is guaranteed income, as is pension income. Once you turn 72 you must take required minimum distributions from your traditional 401(k) and IRA accounts. Though the amount of your RMD is based on your account value, and your age, that too is a constant source of income.

Knowing you have all your essential living costs covered by guaranteed income sources is sure to help you sleep at night.

By now you likely know Social Security will pay a bigger benefit the longer you wait between age 62 and 70 to start collecting. To maximize the guaranteed income you can receive, it’s always smart to consider delaying as long as possible, assuming you are in good health today. That doesn’t mean you must stay at a full-time job you don’t like.

Newhouse advises clients to consider whether part-time work in their mid-60s can make it possible to delay their Social Security benefit. You can log in to Social Security and get an estimate based on your personal earnings record. Take a look at the benefit you could collect at your full retirement age (it’s somewhere between age 66 and 67). Could you manage to earn that with part-time work? If so, each year you manage to delay past that point will boost your benefit by a guaranteed 8% until age 70.

If Social Security (and a pension, if you have one) won’t cover all your essential costs, you might also want to consider using a portion of your retirement savings to purchase an income annuity. With a single premium immediate annuity (SPIA) you hand over a lump sum to an insurer who then pays you a fixed amount each month (you can choose a policy that adds in inflation increases). The payout is based on your age and current interest rates.

Researchers recently reported that having guaranteed income from an annuity to cover basic spending needs seems to deliver powerful peace of mind. The guaranteed income appears to give retirees “a psychological license to spend” more of their other retirement savings.[4]

Consider working with a pro

Even if you’ve successfully saved a bunch for retirement going the DIY route, all the moving pieces of figuring out how to convert that hard work into a sustainable stream of income can be daunting. There are financial advisors you can hire on an hourly, monthly or project basis to work through an overall retirement income plan that is built to deal with inevitable bear markets. You can search for planners at Garrett Planning Network and XY Planning Network.

Article Sources
  1. “The State of Retirement Income: Safe Withdrawal Rates,” Morningstar,
  2. “When Inflation Volatility Strikes: Setting a Realistic Withdrawal Rate,” Vanguard,
  3. “Sequence of Return Risk,” Baird Financial Advisor,
  4. “Guaranteed Income: A License to Spend,” SSRN,

About the Author

Carla Fried

Carla Fried

Carla is an expert on retirement planning and behavioral finance with over 20 years’ experience in personal finance journalism. Her work has been published in Bloomberg, CNBC, Consumer Reports, Money, The New York Times, and other journalism brands.

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