Retiring in a bear market

What to do, what not to do, and withdrawal strategies to keep your retirement on track.

Article published: December 14, 2022

By: Rose Niang Director, Financial Planning

For the first time in decades, retirees are facing three significant headwinds. With a down market, a potential recession, and the current state of inflation – a 40-year high – the overall economic landscape may have many reconsidering what their retirement plans should be.

Now is a good time to consult a financial planner if you haven’t already. They can help you review your financial plan so you can be prepared for a recession. By running through different scenarios, they can help you account for what’s ahead.

Retirement withdrawal strategies during a bear market

As you start thinking about how you’ll take distributions from your retirement fund, keep in mind that a withdrawal strategy needs to accomplish three things: It must provide an income stream to support your goals, help manage the taxes you’ll need to pay each year, and can allow you to feel financially secure through every phase of your retirement and through any market condition. Depending on your lifestyle and preferences – or your own “personal economy” – you may opt for systematic distributions, a dividend income strategy or annuities, or many other options. A financial planner can help you determine which is best suited for you, but here are three types of strategies you may want to consider:

The bucket strategy. 
This strategy calls for putting your assets into one of three buckets.

  • Bucket 1: Your short-term needs (the money you need in 3-5 years) are covered with short-term dollars like cash, money market and other liquid assets.
  • Bucket 2: Your medium term needs (the money you need in 5-10 years) are covered with money invested in a more moderate way such as longer term fixed income assets like bond funds or individual bonds.
  • Bucket 3: Your long-term needs (the money you need in 10+ years) are covered with long-term investments that you want to keep growing in the meantime.This requires a lot of management, moving assets around from short-to-medium to long-term buckets to align with your needs and timeline.

The essential vs. discretionary strategy. 
This calls for your essential expenses being covered by fixed income streams and your discretionary expenses being covered by more variable sources of income like investments.

The fixed rate withdrawal strategy. 
This has you taking systematic withdrawals (a percentage or dollar amount) every month and using it like a paycheck. It’s fixed at the start and may increase slightly the next year to match inflation. While it may shift up or down depending on the market and your needs, it’s important that fixed number not start out too high or become too high of a percentage of your portfolio in order to remain sustainable.

Sequence of return risk and retirement withdrawal strategy

One critical consideration as you plan your retirement withdrawal strategy is sequence of return risk, which is the risk associated with the fact that returns are not sequential. Of course, past performance is not a guarantee of future results, but it’s generally accepted that the S&P 500 has had a 7% long-term, inflation-adjusted rate of return on average1. But, one year you might get 14%, the next year you might get -3%, and the following year the return may be 11%. So, sequence of return risk plays a meaningful role for retirees as they plan for their withdrawal rates. For example, if you have $1 million invested in your retirement plan and you’re withdrawing 4% each year (the general rule of thumb), you’re taking out $40,000. If the market drops 20%, now you have $800,000 and the $40,000 you’re withdrawing is suddenly a much larger percentage of your assets. Now you’re down to $760,000 and if you still withdraw $40,000, that percentage rises again. If you experience consecutive years in a bear market, you can see how that sequence could quickly erode your assets. To counter this, you must avoid assuming too high a rate of return and adjust your withdrawal rate over time, particularly during a bear market.

For those who turn 72 years of age, you also have required minimum distributions that you must take from your retirement fund each year, and that number is recalculated each year based on your balance. Your financial planner can help you be strategic about when and how you take the distribution as well as plan for how it will impact your taxes, Medicare premium and withdrawal rate.

Do's and Don'ts of Retiring in a Bear Market

Whether retirement is imminent or not, there are a few things to do – and avoid doing – to help you prepare in this market environment.

  • Do build an emergency fund. It’s recommended that retirees have at least 12 to 24 months of cash reserves before retirement. Those liquid assets can be a huge help during a bear market by enabling you to take less withdrawals from your retirement fund – or possibly even avoid withdrawals for a period of time while you wait for the market to recover.
  • Do assess your expenses. Now is a good time to consider cutting back on truly discretionary spending to give yourself a little more flexibility through a down market. Look at all your income sources and consider if you would remain comfortable in covering your expenses if the markets got worse before they got better.
  • Do consider working a bit longer. Delaying retirement even a few months – or opting for a phased retirement – can have a surprisingly significant impact on your ability to make your assets go farther. It may enable you to build up your cash reserves, offset the risk of inflation, pay off a high-interest debt, or get through another bonus cycle.
  • Don’t panic. Avoid selling off investments or blindly deciding to put off retirement out of fear. Good planning can help you see through the current market conditions and stay on track with investments that continue growing for the next bear market.
  • Don’t assume you have to spend your RMDs. While you have to take the distribution, there’s nothing that precludes you from reinvesting those funds rather than spending them. If you don’t need to use that distribution now, put the money back into a vehicle that will grow.

On average, since World War II, U.S. large-cap stocks have taken about two years to recover2 from a valley to a peak. But the fear of the unknown and the perception of a negative environment can drive snap decisions or make it difficult to make thoughtful choices about your retirement plan. That’s where a financial planner can help by bringing perspective and preparation. It’s important to remember that market changes balance out over the long term, so as long as you have a financial plan that accounts for the small storms you’ll inevitably face over the years, you will be in a good position to weather them and stay aligned with your retirement goals.

1. Source: Ibbotson SBBI, Morningstar Direct; as of 12/31/2022.

2. Source: S&P Dow Jones Indices, Bloomberg; as of 12/14/22.

Systematic withdrawal plans offer no guarantees. Withdrawing too much from your portfolio could cause your portfolio’s value to decline. Your portfolio’s value will fluctuate with market conditions. All investments have inherent risks. Past performance is not indicative of future results.

Investing strategies, such as asset allocation, diversification or rebalancing, do not ensure or guarantee better performance and cannot eliminate the risk of investment losses. All investments have inherent risks, including loss of principal. There are no guarantees that a portfolio employing these or any other strategy will outperform a portfolio that does not engage in such strategies.

Rose Niang

Director, Financial Planning

With a decade of experience as a financial planner, every day I’m thankful for the opportunity to help my clients discover how they can plan wisely to ensure their financial future is everything they dreamed it could be. When not working, I’m enjoying family time and staying active with yoga and pilates, which is good since I love cooking. I’m also fluent in French.

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