How To Retire During A Bear Market – Forbes Advisor

Imagine yourself withdrawing from this market. A 60-year-old who owns a mixed fund that is 60% invested in stocks and 40% in bonds has seen the value of his investment fall 18% so far this year.

Rising prices only make matters worse. Our 60-year-old not only has fewer assets, but his savings are no longer sufficient for the past. In fact, financial advisors say their clients have been more concerned with gas and food prices than the terrible stock market.

“Inflation is the biggest issue I’ve heard about lately,” said Ashlee Walton, Senior Financial Planner at James Investment Research Inc. “Clients don’t have much experience dealing with inflation this high and they are concerned it is a longer-term scenario.”

Make no mistake, inflation is the main reason for the dismal stock market performance so far in 2022. The Federal Reserve is raising interest rates to stifle price growth, stealing cheap money from stocks and tech companies, and also causing pain and suffering in the bond market.

For almost everyone, 2022 was nearly as bad as 2008. Here are strategies for retirees and near-retirees to stay the course in a bear market.

Test your retirement budget

For many people, life in retirement is very different than what they imagined. Only a quarter of respondents in a recent Employee Benefit Research Institute (EBRI) survey said their day-to-day experience matched what they expected before retirement.

One of the biggest adjustments is getting by on a steady income. That’s why Catherine Collinson, executive director of the Transamerica Center for Retirement Studies, recommends that investors do a “retirement test drive” before actually giving up.

“Find out how easy or difficult it is to stay on budget,” Collinson said. This will make it easier to adjust spending in times of high inflation and economic troubles.

Let’s say your annual household income is $100,000 and your current retirement plan would provide 80% of your preretirement income. Spend some time getting by on your projected income instead of what you are currently earning.

The transition won’t be easy, but that’s the point of the exercise. Introducing fixed income requires a psychological shift in your intuitive understanding of what you can really afford. It’s best to acclimate to this new lifestyle before playing with live ammunition.

Stick to your financial plan

People often call their financial advisor when markets are storming and economic news is sounding bad, driven by the urge to do something to fix the short-term discomfort. It’s understandable, but this urge is misplaced.

Those who have good control of their long-term finances usually have a written financial plan. A recent survey by Hearts & Wallets found that people who created a financial plan had more money, better diversification, and higher levels of confidence in their retirement.

Walton suggests retirees go back and review their financial plans when markets start to look bad. This can help them appreciate the larger arc of their life after work.

“Otherwise you don’t know what to compare,” Walton said.

Meanwhile, the lack of a plan is usually felt when times are tough. Instead of falling back on a foundation, you could try to buy or sell your way out of a bad year for your portfolio, which only creates worse problems down the road.

If you don’t already have a financial plan or retirement plan, now is the time to contact a paid financial planner and get to work.

Build a cash reserve

You can weather bear markets and invest missteps, such as B. Sell when stocks are falling early in your career. This is because you have plenty of time to correct course.

Once retirement approaches, you no longer have that luxury.

“Retirees don’t have time to wait for the market to recover,” said Jesse Piburn, director of advisory service at Personal Capital. “If they withdraw from their pension funds in a down market, they have less wealth to grow when the market recovers.”

A key part of saving for retirement is building up a significant cash cushion so you don’t have to sell stocks when they’re down to fund your expenses. Part of your retirement plan should be funding a cash bucket that you can use to top up guaranteed income from sources like Social Security, pensions, and annuities.

“Consider having six to 12 months’ worth of liquid cash or cash alternatives outside of your retirement portfolio so you can withdraw from them when needed without touching your portfolio,” Piburn said.

Optimize your tax strategy

If you need to sell something, be strategic about which account you use.

Selling a taxable brokerage account may make sense if you are able to take a capital loss that lowers your tax bill from other sources of income.

Even if you sell a winner, long-term capital gains tax rates can be lower than your marginal tax bracket, which you would pay if you received distributions from an IRA.
“It’s not just about what you’re selling, but where you’re selling from,” Walton said.

Now might also be the time to consider a Roth IRA conversion. You may be able to pay less tax (because profits are generally lower) and enjoy tax-free growth once the market recovers.

Only do this, however, if a Roth conversion makes any sense at all, ie you have enough cash to pay your tax debt and expect your tax rates to increase in the future.

Get a part-time job

One of the best ways to alleviate your financial crisis is to take a part-time job to supplement your income.

While a looming recession may dampen your optimism, this particular downturn won’t hit the job market as hard as recent ones. For example, while the Federal Reserve expects the unemployment rate to rise to 4.4% next year, that’s very low by historical standards. The unemployment rate in September 2009 was 9.8%.

Making some money while ostensibly retired, despite being something of a scam, has a few perks.

The first is obvious: by earning income, you free up your portfolio and reduce the need to withdraw into a bad market. A paycheck not only helps your finances now, it also improves your long-term prospects, especially if you can delay paying Social Security until at least full retirement age.

Re-entering the labor market may seem impossible, but it is a lot easier than you can imagine. You are an experienced, reliable worker who does not seek the perks of a full-time employee.

Additionally, a consistent performance that doesn’t take up too much time will help structure a new phase of your life, suddenly turned upside down by sky-high inflation, a terrible market, and a European war.

At least it gives you something else to think about.