Key Points
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When deciding on the right time to retire, it’s essential to understand your post-retirement budget.
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It’s always a good idea to check your portfolio’s balance, but it’s rarely more important than during a bear market.
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Carrying high-interest debt can torpedo hopes of retiring in style, particularly during a bear market.
Whether you’re actively planning for retirement or simply dreaming of the day you can retire, you probably have questions. For example, you may wonder how much you must save to retire in style. You may also wonder what you’ll do if the U.S. enters a bear market around the time your retirement day arrives.
A bear market is characterized by a period during which equity markets are down 20% or more from their most recent peaks. In addition to price drops, investors begin to panic-sell. At the same time, unemployment rates rise, and corporate confidence falls. Overall, it can feel scary.
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If you should find yourself in the position of retiring in a bear market and aren’t sure you’re ready, here are four questions you should ask yourself.
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1. How does my post-retirement budget look?
It’s important to know where you stand going into retirement (this is true whether there are concerns of a bear market or not). First, list your expected income from all sources, including Social Security, pensions, annuities, rental property, income from a side business, royalties, and all other sources.
Next, list all your monthly expenses, including housing, healthcare, transportation, groceries, and utilities. If you must pay for it, make sure it’s on the list.
Once you have those two lists, compare your income to expenses. If you’re unsure whether you have enough, you may want to consider working longer. Not only will you have more time to save, but you’ll also have more time to tweak your budget.
2. Does my portfolio need rebalancing?
Checking your portfolio to ensure it doesn’t need rebalancing is another thing you’ll want to do, whether or not a bear market is around the corner. Here are two reasons for making changes to a portfolio that’s out of alignment:
- Helps manage risks: One hallmark of a bear market is how some asset classes are negatively affected while others remain stable or increase in value. In other words, a bear market can disrupt the balance you’ve worked so hard to achieve. If that’s the case, you can restore your portfolio’s risk profile by making the necessary adjustments.
- Allows you to focus on something constructive: Just as you can’t control which way the wind blows or whether your favorite television show is canceled, you can’t control when a bear market will occur. Bear markets are famous for triggering emotional (often knee-jerk) reactions. When you focus on rebalancing your portfolio, you can do something productive, rather than burning energy by worrying.
3. Am I carrying high-interest debt?
Debt is not the enemy, particularly when that debt carries a lower interest rate. However, post-retirement finances, in general, are likely to be tighter if you’re paying debt with a high interest rate, such as credit card debt. While there’s never a good time to cut your monthly budget close, a bear market could make it even more stressful.
Look at your current debt level and decide if there’s anything that should be paid off before you retire. Again, this may require you to work a bit longer, but it’s a good way to smooth out your budget and decrease stress.
4. Do I have a plan to preserve my retirement fund?
A bear market can be one of the worst times to withdraw money from your retirement account. Here’s why: Many investors get spooked during a bear market and begin panic selling. As more assets hit the market, values decrease. That means you must sell more of your holdings to withdraw the amount of money you’re counting on.
If you hope to thrive in a bear market, make sure you have money in a liquid account — like a money market account (MMA) or certificate of deposit (CD) — from which you can draw money, instead of using your retirement account.
According to Charles Schwab, the stock market has historically returned to its previous peak following a bear market within a few years. If your money is allowed to remain in your retirement account rather than being withdrawn, there’s more money available to buy high-quality, discount-priced stocks. There’s also more room for your portfolio to grow along with the recovering market.
Few investors look forward to a bear market, but there’s little to fear. At look at the S&P 500 index from 1961 onward shows that the average bear market lasted roughly 13 months, while the average bull market ran for approximately five years. That means that your retirement account can spend far more time growing than shrinking in value.
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