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Retiring into a bear market: How to weather a downturn

Shelly  Gigante

Posted on September 26, 2022

Shelly Gigante specializes in personal finance issues. Her work has appeared in a variety of publications and news websites.
Retiring into a bear market

No one likes to watch their retirement savings wither in a stock market decline, but for those on the cusp of retirement, or just wading in, plunging portfolio values present an even bigger potential threat to their financial security.

And it can happen. While over the long term history shows that markets exhibit sustained — or, when surging, bullish — growth, there are points where they retreat. A drop of more than 20 percent is called a bear market. And such bear markets can present challenges for certain age groups.

Indeed, while younger investors with an asset allocation that befits their financial goals and risk profile are generally advised to stay the course during market downturns — and perhaps take advantage of dollar-cost averaging to contribute to their retirement accounts — older Americans who are ready to retire often face more difficult choices because their time horizon is shorter.

“For anyone retiring soon, a stock market sell off is worse than it would be for younger investors,” said William Parrott, president and chief executive officer of Parrott Wealth Management in Austin, Texas. (Learn more: Beware retirement's overlooked risk: Sequence of returns)

There are some bear market strategies pre-retirees can use to help mitigate the challenge. These include:

  1. Checking your portfolio mix
  2. Connecting with a financial professional
  3. Working longer
  4. Delaying Social Security
  5. Calculating retirement income scenarios
  6. Establishing cash reserves and alternative income sources
  7. Downsizing

Regardless of age, however, the most important rule of investing is to remain calm, especially when retirement account balances drop, said Parrott. 

"'Don’t panic’ should be at the top of that list,” he noted. “And ‘review your asset allocation’ should be a close second.”

Fix your investment mix

It’s appropriate during times of market volatility to review your portfolio and rebalance as needed to ensure it still aligns with your financial objectives and risk tolerance, said Parrott. That means buying or selling a percentage of your assets to maintain your desired allocation of stocks, bonds, and cash. (Learn more: Fix your mix: Asset allocation)

Why? Over time, certain asset classes outperform (or underperform) other investments. As a result, your portfolio may no longer reflect your target allocation, time horizon, or need for liquidity. Periodic rebalancing is an important part of managing risk, which helps investors avoid costly knee-jerk reactions to market fluctuations. 

“If you’re comfortable with your original allocation, you should rebalance your account regularly to keep your risk level intact,” said Parrott.

You should not make the mistake of becoming too conservative during a bear market by parking all your assets in cash. Even in retirement, most investors still require some exposure to equities (stocks) to outpace inflation and preserve purchasing power.

Contact your financial professional

Now is a good time to stop staring at your 401(k) balance, which may be fueling your anxiety, and connect with a financial professional for bear market strategy guidance. Not only can the conversation offer some assurance, it can end up saving you time and money in the long run. (Related: Working with a financial professional vs. going solo)

To weather market storms, you must take emotion off the table. Investors who exit the stock market when a bear market takes hold almost invariably end up with lower long-term returns. Driven by panic, they tend to sell when the market suddenly drops and buy only after the stock market recovers, which perpetuates a pattern of buying high and selling low.

The better bet for buy-and-hold investors, who do not have the expertise or interest to actively trade, is to build a balanced portfolio and stick to it regardless of which direction the stock market winds may blow. (Learn more: Winning with a steady strategy

“When a concerned client calls during a bear market, I’m able to check their plan and tell them that their financial foundation is still solid and this gives them peace and hope,” Parrott said.

Staying employed to weather a bear market

Depending on how far the markets fall and how their portfolio is positioned, pre-retirees may need to consider working for a year or two longer.

“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, Florida.

That may be unwelcome news, but it does serve a dual purpose, allowing them to funnel extra savings into their retirement account through catch-up contributions and giving their investment portfolio time to (hopefully) recover.

For many, the decade before they retire reflects their peak earnings years with the fewest demands on their income. For example, their mortgage may be paid off and their kids may be off on their own.

If that’s not compelling enough, keep in mind that it’s much more damaging to one’s financial health to retire into a bear market due to “sequence of returns risk.” To be sure, virtually all financial projection models assume that stocks will rise and fall throughout one’s retirement. But if your portfolio falls, say, 15 percent early on in your retirement, your need for future returns to offset that initial loss may be unsustainable. And once your distributions begin, any earnings your portfolio does produce will be based on a reduced portfolio size.

Take note that if you’ve suffered a late-career job loss, or feel that you might, the AARP offers tips on how to negotiate a better severance package and how to create new income streams in the gig economy. The AARP also offers a job board with opportunities for experienced workers, as does the

Delay Social Security

The other benefit of working longer is that it enables you to delay the age at which you begin claiming Social Security benefits, which is arguably the most effective way to give yourself a guaranteed raise in retirement.

If you are eligible for Social Security, you can begin claiming benefits as early as age 62, before your full retirement age, which is either 66 or 67 depending on your birth year. But the amount of your monthly benefit will be permanently reduced by up to 30 percent to reflect the additional months or years you will collect. Conversely, for every year you delay taking Social Security benefits beyond your full retirement age, the government offers delayed retirement credits, which are equal to 8 percent per year in simple interest increases.1 (Learn more: Four simple ways to delay Social Security

The benefit increase no longer applies once you reach age 70. Those who can afford to wait until at least their full retirement age to claim Social Security may enjoy greater financial security, regardless of how their stock portfolios perform.

Do the retirement math

There’s no time like the present to get a firm handle on your monthly retirement budget. Tally up the amount of money you will have coming in from Social Security, your retirement and taxable brokerage accounts, personal savings, pension funds, and annuities.

If you are 72 or older, the new age at which Required Minimum Distributions (RMDs) must begin from your pretax retirement accounts, such as your IRA, don’t forget to factor RMDs into your income. Take note that RMDs, which are mandatory and based on your account value, can significantly reduce your retirement savings during a bear market. For example, a 74-year-old investor whose IRA assets were valued at $500,000 at year-end 2021 would have to take a $19,607 RMD in 2022. Had that investor taken their distribution on Jan. 1, 2022 before the markets fell, their account would have been left with $480,393. By waiting until the fall of 2022 to take their RMD, however, when the average retirement portfolio value (based on an allocation of 60 percent stocks and 40 percent bonds) was down roughly 25 percent, their IRA value would be worth $360,295, according to an analysis by Barron's.

Next, calculate the amount of money you will have going out, including your mortgage, utilities, groceries, car loans, credit card payments, and health and life insurance premiums.

Carefully consider which of your expenses during retirement may be lower (perhaps you will have paid off your house), versus which are likely to be higher. For example, many retirees underestimate the cost of future medical expenses. According to Fidelity Benefits Consulting, a 65-year-old couple retiring today with traditional Medicare insurance coverage will need an average of $300,000 (in today’s dollars) to cover medical expenses such as copays and deductibles throughout retirement, not including any costs associated with assisted living or long-term care.

Some financial professionals suggest living on your projected retirement budget for at least six months before you actually retire to test your ability to make ends meet without depleting your nest egg. The AARP offers a Quick Retirement Budget Worksheet to help keep you organized. 

Create a cash cushion

Many financial professionals recommend working adults set aside from three and six month’s worth of living expenses in a liquid, interest-bearing account, such as a savings or money market account.

Retirees, who have no new paychecks coming in, may need far more.

The reason? A “cash stash” can help pay for unexpected roof repairs or medical bills. But it can also become a source of income during retirement when the stock market takes a tumble, so you don’t have to liquidate your equity (stock) investments in a down market.

“Retirees should have different places to pull income from and having an emergency fund coupled with some lower-risk, short-term investments could help them weather a market downturn so they do not have to pull income from depreciated assets,” said Hernandez.

Additionally, a cash cushion may grant retirees the flexibility to keep a portion of their portfolio invested in growth-oriented stocks, which helps mitigate longevity risk (the risk of outliving your assets). (Learn more: Short retirement horizon? Be careful)

Parrott recommends that pre-retirees consider putting some of their cash in short-term U.S. Treasury bills, or T-bills, a conservative fixed-income bond issued by the federal government that matures in a year or less.

“A suggested amount is three years' worth of expenses,” said Parrott. “The safety of T-bills will allow you to survive a typical correction in retirement.”

Other possible sources of cash during retirement include:

  • A home equity line of credit (HELOC), which is a revolving credit line that uses your home as collateral. HELOCs are easier to secure while you still have a job, because banks want to be sure that borrowers have enough income to pay the interest. The amount you may borrow is based on a percentage of the equity available in your home and the money you borrow can be used for any purpose. Be aware, however, that because the loan is secured by your home, the lender could foreclose on your home if you default.
  • Reverse mortgages, which enable seniors age 62 or older to tap a portion of the equity in their homes to pay off credit card bills, handle medical expenses, or supplement their income without having to sell their home. There’s no repayment until your home is no longer your primary residence, but the loan must be repaid in full when you move out or pass away. While new consumer safeguards are in place, borrowers who default on their loans could still potentially lose their homes. Many opt to consult a financial professional before making such a move.
  • Cash value life insurance, which can be used to help supplement retirement income. While life insurance is first and foremost about protecting the ones you love after you are gone, a permanent (cash value) life insurance policy may provide an added layer of financial security. Such policies, including whole life, universal, and variable life insurance policies, build up cash value as policyowners make premium payments over time. Policyowners can withdraw or borrow against their cash value at any time and for any reason, like paying for their kid’s college tuition or supplementing their retirement income in a market downturn.3

If you’re determined to retire on time despite your underperforming portfolio, you may still be able to do so. Indeed, financial professionals say it’s even possible to retire in a recession if you plan ahead. 

For example, you may have to assume greater investment risk to compensate for early portfolio losses. Or, you may need to harvest capital losses by selling stocks that have dropped in value to offset future capital gains.

Downsize your lifestyle and home?

Another option is to simply lower your lifestyle expectations in retirement. If you previously projected you could withdraw 4 percent per year from your personal savings without running the risk of outliving your assets, you may now be able to withdraw only 2 percent — at least until the stock market recovers.

To build more flexibility into your budget, you could also consider downsizing to a less expensive house, renting out a room in your current home to generate extra income, or relocating to a more tax-friendly state. But don’t make any moves without first consulting a financial professional, who can help you think through the financial and emotional implications of those options. (Related: Downsizing your home in retirement: Rent or own?)

“These are life-changing, long-term commitments, and the questions I would ask my clients are whether they really want a tenant in their own home and whether now is the really the right time to sell their current home,” said Hernandez. “What if they move permanently? Can they obtain long-term care services at a reasonable cost in their new home state if needed? Some of these choices have significant long-term ramifications.”

Whether you plan to retire next month or next year, it’s important to consider the effects that a stock market decline may have on your financial well-being. Bear market strategies like creating a cash cushion, rebalancing your portfolio, and potentially working a bit longer, can help you take worry off the table.

Discover more from MassMutual…

When markets dive, keep your strategic calm

Tips to help maximize your retirement income

Need a financial professional? Find one here

This article was originally published in 2020. It has been updated. 


1 Social Security Administration, “Retirement Benefits: Delayed Retirement Credits” NO DATE

2 Fidelity Benefits Consulting, “How to plan for rising health care costs,” Aug. 31, 2021.

3 Be aware that tapping into your life insurance policy’s cash value decreases the remaining cash value as well as the death benefit. It also increases the likelihood that the policy will lapse and may result in a tax.

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The information provided is not written or intended as specific tax or legal advice. MassMutual and its subsidiaries, employees, and representatives are not authorized to give tax or legal advice. You are encouraged to seek advice from your own tax or legal counsel. Opinions expressed by those interviewed are their own and do not necessarily represent the views of MassMutual.