Key Points
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Retirees simply can’t risk suffering the same sort of temporary volatility that younger investors can.
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However, trying to predict exactly when bear (and bull) markets are beginning is impossible.
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An all-weather portfolio should perform well enough in bull markets without struggling too much in bear ones.
The risk of a bear market isn’t quite is great as it seemed to be just a few months ago when newly imposed import tariffs were taking a toll on stocks. There’s still going to be one sooner or later, though. That’s just the market’s cyclical nature.
So what (if anything) do investors need to do about this inevitable setback whenever it materializes? It largely depends on their particular situation. Younger people with time to ride out the rough patch should do so. But older investors who are near or already in retirement? That’s a different story.
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With that as the backdrop, here are four specific things retirees will want to consider about bear markets in order to minimize their overall long-term impact on retirement plans.
1. They’re far more dangerous early in your retirement than later
Living on your retirement savings is something of a balancing act. You’re still trying to grow your money — or at least preserve as much of it as is feasibly possible — while at the same time you’re withdrawing money from this very same retirement account. If you end up doing too much of the latter, it becomes very difficult do the former.
The so-called 4% rule of thumb is a way of maintaining this balance. This rule simply says that withdrawing 4% of a 50/50 portfolio (50% stocks/50% bonds) in your first year of retirement and then increasing your withdrawal every year by the prior year’s inflation rate should allow your portfolio to last 30 years — assuming the market’s long-term historical performance persists into the future.
Some number-crunching done by Morningstar as well as brokerage firm Charles Schwab, however, adds some important context to the 4% rule. That is, suffering sizable losses early in retirement dramatically raises the odds of not getting a full 30 years out of your retirement savings. Namely, Morningstar noted that 70% of its portfolio simulations that ended in failure were linked to losses taken in the first five years of a 30-year stretch. Similarly, Schwab’s math indicates that a 15% (or more) setback during the first two years of retirement would likely completely deplete the account by the 18th year of retirement.
The issue is the cascading effect of having less money left in the account early on to achieve some growth. It just doesn’t become evident until several years later, when there’s far less you can do about it.
2. You should be comfortable enough with your holdings to not care (much)
The trick, therefore, is building a portfolio that’s incapable of suffering such a major setback. Ensuring you’re at a 50/50 allocation will significantly help, but you’ll also want to make sure that the half of your portfolio consisting of stocks are the right ones to hold in retirement. If you’re holding a bunch of risky technology stocks that are overly vulnerable to bear markets, you’re still taking on more risk than retirees arguably should.
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In this vein, it’s also worth mentioning that trying to predict a bear market and adjusting your portfolio accordingly can be just as problematic. Plenty of feared bear markets never actually take shape, leaving too many investors underinvested at the worst possible time. You really want to assume you can’t predict anything, and therefore remain as prepared as possible for every potential outcome.
3. Adjust your spending before you start selling stocks just to fund withdrawals
But what if the bear market has gone on for too long or done too much damage to continue supporting the retirement income you need? It could happen.
Before you start selling stocks just to continue making predetermined withdrawals, do everything in your power not to. You’d be better served in the long run by finding a way — any way — of reducing the size of your annual distribution for even just a couple of years rather than selling beaten-down stocks that may be on the verge of a rebound.
This might help encourage you to hang on: Statistics say a recovery is likely to be closer than you think. The average bear market only lasts a little less than 10 months, according to data from mutual fund company Hartford Funds. If you can avoid selling anything in the middle of one, it’s well worth it.
Of course, this is also why it’s smart to have up to a couple years’ worth of cash needs tucked away in a retirement account. It doesn’t feel all that productive, but the less flexible your spending is, the more you need to plan on the worst-case scenario. Two years’ worth of cash needs should do the trick.
4. The market will eventually recover, and you want to be fully invested when it starts
Finally, most everyone understands that stocks will eventually bounce back from a bear market. They always do. The hard part is not knowing exactly when. If you think you’re going to know when a recovery starts taking shape, however, think again. Not only is it impossible to know exactly when a rebound is starting, waiting even just a little while to know for sure can dramatically crimp your long-term returns.
As Hartford Funds also points out, the first half of a bull market typically outperforms the second half. But even then, waiting for absolute certainty can prove costly. Stocks gain an average of 13.6% in just the first month of a new bull market, and gain 25.3% — again, on average — during a new bull market’s first three months. You don’t want to miss out on any of that.
So, as difficult as it may be to do so, you’ll want to remain as fully invested as you feasibly can into and through a bear market — even if that means picking stocks very differently than you did before you retired.
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Charles Schwab is an advertising partner of Motley Fool Money. James Brumley has no position in any of the stocks mentioned. The Motley Fool recommends Charles Schwab and recommends the following options: short September 2025 $92.50 calls on Charles Schwab. The Motley Fool has a disclosure policy.
