Key Points
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It’s not the time to be making any major changes to your portfolio’s allocation.
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Don’t forget your portfolio still needs to achieve at least some growth while also generating enough income, which means riding out the bear market without being forced into selling.
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A nice amount of cash provides you with the time and flexibility you need to effectively navigate a bear market’s turbulence.
Retirement can be as scary as it is exciting. That’s particularly true if you’re retiring in the middle of a bear market. The bulk of your retirement income will likely be coming from your retirement savings, after all, but starting out while the value of your savings is markedly lower could cause permanent damage to your retirement cash flow.
Assuming annual withdrawals of 5% of the portfolio’s value, number-crunching done by brokerage firm Charles Schwab indicates that a modest 15% pullback in the value of a typical retirement portfolio within the first two years of living on your savings would likely mean its depletion within 18 years. Morningstar‘s comparable math, conversely, suggests that simply avoiding major portfolio setbacks during the first five years of retirement almost guarantees you won’t run out of money in your golden years (again, assuming reasonable yearly withdrawals).
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In other words, while you can survive a bear market at some point during your retirement, you certainly don’t want to start your retirement on the wrong foot.
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With that as the backdrop, here are five important questions you should ask — and answer — before giving up your work-based income and retiring in a bear market.
1. Will my portfolio need be reconfigured just because I’m retiring?
It’s not just an important question. It’s arguably the most important question. That is, will your portfolio need to be dramatically altered specifically because you’re retiring? (Most likely this would be a shift away from growth holdings and toward income-producing ones, although this may not be your only necessary move.)
If the answer to the question is yes, it may not be the ideal time to retire. That’s because you’d very likely be making some exits at temporarily subdued prices. Sure, you’re also buying new income-generating holdings like dividend stocks or bonds at lower prices. On balance, though, you don’t want to be forced out of your growth holdings during a bear market, since they’ve almost certainly suffered bigger setbacks than the dividend stocks you’re now looking to purchase.
On the flipside, if your portfolio is already looking the way you want it to in retirement and therefore doesn’t need to be changed at all, marketwide weakness at the onset of your golden years means little to you.
2. Is the worst of it likely over?
You should always be cognizant of the fact that you can’t perfectly predict the future. You can, however, come to reasonable conclusions about what the future likely holds. In this instance, you can at least get a pretty good feel for how much longer a bear market driven by economic weakness is going to last.
And good news! Bear markets tend not to last nearly as long as you might think they do. Schwab says the average bear market for the past several decades only lasted 14 months, while Hartford Funds puts the figure closer to 10 months; the lingering weakness from 2007’s subprime mortgage collapse and 2000’s dot-com meltdown was actually quite unusual. The average pullback from peak to trough has also been about 30%, for perspective.
It matters simply because you may be able to wait it out, or confidently go ahead and retire because you’re comfortable that a recovery is around the corner.
3. Am I actually positioned properly for a market recovery?
That being said, perhaps one of the most underestimated stumbling blocks in retirement isn’t a portfolio that isn’t defensive enough. Rather, it’s one not positioned well enough to capture enough of any recovery.
Yes, your investments are largely an income engine once you’re no longer earnings a work-based income. Your income engine should be able to grow your retirement income over time, however, keeping up with inflation for the typical 20 years you’ll likely live into retirement. To do this, you’ll need to achieve at least some capital appreciation even after you begin living off of your savings. This means owning stocks capable of making some capital gains even if their primary purpose is generating income.
And no, you can’t realistically wait to jump in once you see the recovery is starting to take shape, mostly because you won’t likely see or believe it until after it’s too late. Hartford points out that 28% of the market’s biggest daily gains since 1995 have materialized during the first two months of a new bull market, when few investors are expecting them (while half of these biggest daily gains actually took shape during a bear market). Separately but similarly, Hartford says the average gain during the very first month of a new bull market is nearly 14%, and more than 25% for its first three months. You can’t afford to miss out on any of that part of the rebound.
The point is, your portfolio must simultaneously be fully defensive as well as fully offensive at all times.
4. Do I have enough cash to ride out the worst-case scenario?
That doesn’t necessarily mean all your money must be invested in the market, though. In fact, if you’re nearing or in retirement, some of your portfolio should arguably be in cash or a cash-equivalent holding. Although this may not be feasible for some, the rule of thumb is keeping two years’ worth of living expenses immediately accessible.
Now, you won’t likely actually need it. You do, however, want to make sure you’ve got enough fiscal flexibility to avoid being forced into selling an investment or buying a new one at an inopportune time. Liquidity buys you the time you may need to wait for a better entry or exit price.
5. What am I willing to give up to ensure my nest egg lasts long enough?
Finally, if you’ve answered all the questions above and realize retiring in the middle of a bear market just isn’t going to be feasible, it’s time to get serious about making some sort of sacrifice. What are you willing to give up, knowing you’ll have to give up something of value?
This might mean saying no to the purchase of a vacation home, or maybe letting go of the idea of restoring your dream car. Perhaps it’s time to downsize your home and put some of that equity into an investment that safely — even if slowly — grows in value. It’s even possible that it’s in your best interest to continue working rather than relaxing at the beach.
Whatever it may be, just be as specific as you can about the upside of the decision and how it changes your bigger retirement picture. You may find you’re not necessarily saying “no” to something as much as you’re just postponing it until you’re in a better financial position to make it happen.
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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 December 2025 $95 calls on Charles Schwab. The Motley Fool has a disclosure policy.
