Retirement in a bear market for equities is frightening. Here's how to prepare.

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Most of us spend our professional lives saving for retirement. But retirement is not just about grandchildren and golf clubs; it is also the moment when a financial plan is most at risk. And the next wave of retirees could be particularly vulnerable.

We are in a decade with a strong bull market – despite the 3% drop this week in the
Dow Jones Industrial Average
and 2.6% fall into the
S & P 500.
Bulls do not die of old age, as they say, but they slow down. And whether you are in the camp where the market is about to fall, slow down or continue, there is virtually no market strategist, economist or investor who expects the next 10 years to look like the 10 latest. Investors – and new retirees in particular – need to prepare for much lower returns and protect themselves from a slowdown.

An early downturn in the retirement market is much more damaging than a decade or so. This is called sequential risk: it's one thing to expect an average annual return on your portfolio of 6%, for example, over the next 20 years, but the markets do not move on average. They may fall a few years in a row, then several years, and so on. When the market falls prematurely in retirement, just as retired people retire to finance their way of life, this can be a problem. The calculation is simple: if your wallet drops by 20%, you need a 25% gain to get back to your current situation. And if you withdraw money to live, your balance is even lower and requires an even bigger recovery to recover.

Take the example of an investor who has retired with $ 100,000 and whose average annual returns have been 6% over 25 years. In the first scenario, the market increases in the first eight years, then falls, then increases, and so on. After 20 years, this investor has almost tripled his money to $ 294,000, according to Fidelity. Second scenario: the market falls 15% the first year, 4% the second and 10% the third before rebounding. After 20 years, the portfolio is at zero.

And then there is the psychological effect: The first years of retirement generally require a little more money: people often work part-time, socialize more and travel. A marked downturn when you start enjoying your retirement can have a detrimental effect on your emotional health.

But if there is a need to prepare, there is no reason to panic. Here are some things you can do if you are worried about withdrawing into a bear market.

Boost your money

Retirees are cautioned not to be too conservative – they need a good stock of stocks as they need growth in their portfolio and they should not be too conservative in cash or bonds in the short term so their savings do not follow inflation. But in the second year before retirement, it is profitable to increase your cash reserves. Sean P. Smith, investment manager at Accredited Investors Wealth Management, advises clients not to lose more than three years in retirement. Having money means that you will not need to sell stocks in a declining market – it's never a good strategy – and allow you to live the lifestyle you have planned in the budget.

Move your asset allocation

You may be living in retirement for 30 years or more. Although you probably have to grow your portfolio with retirement equity exposure, it is tactical to reduce your holdings in the few years before you retire. Although you have more cash to cover your immediate expenses, increasing your exposure to equity bonds will reduce the risk of a dramatic decline in your portfolio as soon as you retire from work.

"It's good to be conservative during the most terrifying period of your investment life," says Ferri Investment Solutions founder Rick Ferri, who will advise his clients to increase bond risk in retirement. at 60% or more, especially if their portfolio is not large enough to withstand a significant market decline.

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Retired researchers Wade Pfau and Michael Kitces have discovered that your capital / bond ratio should look more like a roller coaster in your life. Share allocations should remain high early in your career, then decline with age, peaking a year or two before retirement to less than 40%. This equity exposure should slowly increase again to reach about 60% a decade or more after retirement, so your withdrawals do not reduce your savings. In these scenarios, Pfau and Kitces found that even if you retire in a bull market and your returns drop, you would be more likely to have a longer life than you, although you may leave a legacy longer. small.

Work a little longer

If market turbulence increases as you approach retirement, consider working a little longer, if you can. Another year of your paycheck rather than your savings can be profitable for decades, as mentioned above; you may be able to save a little more and your social security benefit will increase. In fact, according to the National Bureau of Economic Research, working three to six months longer can have the same effect on your retirement income as increasing your pension contributions by one percentage point over 30 years of employment. . The report indicates that the benefits of moving to less expensive funds, or even saving more, decrease with age. Raising retirement income is no more stimulating than delaying social security.