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What Retirees Need to Do in a Bear Market

·5 min read
panida  wijitpanya / Getty Images/iStockphoto
panida wijitpanya / Getty Images/iStockphoto

It’s easy to ride out stock market highs and lows when you’re still working. After all, the common advice for managing your 401(k) in a down market is standard: Just wait it out. The average bear market — usually defined as a dip in securities of 20% or more from recent highs — can last 13 months from growth peak to bottoming out and bounce back to breakeven at around 27 months. If you’re in your 40s or 50s, the best move is to take a deep breath, brew some herbal tea and be patient.

See: How Long Do Bear Markets Normally Last?
Find Out: What Is a Bear Market?

But if you’re on the verge of retirement or already retired, you’ll need a different approach (or stronger tea!). You’re at the point where you need to start putting your money to work. Simply waiting a few years for the markets to go through their natural cycle might not be a possible option.

As such, using a more nuanced response to a bear market is necessary — one that neither results in costing you money through panicked selling, nor leaves you unable to enjoy your retirement the way you see fit. So, here’s a closer look at how you should approach a bear market as a retiree.

If You Are Close to Retirement

If you’re still working but haven’t retired yet, the main method for preparing for a bear market retirement is adjusting your asset allocation before stocks start to fall, namely, moving your money out of stocks and into bonds and cash the closer you get to the end of your career.

If you have kept moving assets into bonds over time, you should be in reasonably good shape even when the stock market doesn’t play along with your personal timetable. In fact, dropping values on the stock markets will almost always mean the face value of your bonds will be rising, so you could be in a relatively strong position depending on how aggressively you’ve been shifting things around.

However, if you haven’t prepared for the downswing, there are still workarounds. Firstly, as unpleasant as it sounds, you might consider delaying your retirement by a few years. Not only can you avoid selling stocks when the prices are down, but you’ll boost your monthly Social Security payments by as much as a third if you put off your last work day.

If you’re not ready to do that, one calculated risk you could take is to focus on selling off portions of your bond portfolio. Since bonds are usually up when stocks are down, you should be getting a good price and you can probably make up ground after markets recover by shifting money back into bonds when they’re down and stocks are back up.

Be aware that in a worst-case scenario, this method could backfire on you significantly. Your asset mix is already stock-heavy and you would only be making that more so in the short term. A lengthy bear market could leave you in an even worse situation years later. When in doubt, talk to a financial advisor.

If You Have Recently Retired

Once again, if you stayed ahead of things with your asset allocation, a bear market retirement shouldn’t lead you to make any drastic changes to your retirement plans. However, take into account one consideration: Ensure any part of your portfolio you are selling off in the near term be from your bond portfolio until the market recovers, at which point you can tweak things again to rebalance to your desired asset allocation.

If you have failed to keep enough of your portfolio in bonds and cash, the important thing to remember is that overreacting could just make things worse. You’ve got many retirement years ahead of you, so finding adjustments to your finances that don’t involve selling off stocks is ideal. That might mean cutting back on your spending, downsizing your home and leaning more heavily on your Social Security checks for a few years.

Or you could consider looking for some short-term ways to pick up extra income, such as consulting gigs in the industry you just left. Either way, making some smaller sacrifices now can help you avoid much bigger ones later on. Remember to learn from this and be sure to shift money from stocks to bonds and cash after the smoke has cleared.

If You Have Been Retired for a While

Keeping the right mix of stocks to bonds in your portfolio will help you avoid having to worry too much about riding out a bear market, even deep in your retirement. Sound familiar?

Repetitive as that advice might sound, there’s a reason why it’s so accepted. Bonds that you hold to maturity and cash are pretty much the go-to, tried-and-true methods to buffer yourself against market volatility — and the ones that matter the longer you’re retired.

See: What Is a Bear Market vs. Bull Market?
Find: Inflation and Market Conditions Have the Creator of the 4% Retirement Rule Changing Course

That said, if you tried to boost your retirement account by shifting to a stock-heavy mix and then got burned — exactly what most financial advisors would suggest not to do — it’s still not the end of the world. You’ll just need to make some tough choices about how to proceed, and the same suggestions apply: Consider taking on a part-time job or downsizing your living situation. Other than that, you might just have to bite the bullet and take a hit on your portfolio.

David Nadelle contributed to this article.

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This article originally appeared on GOBankingRates.com: What Retirees Need to Do in a Bear Market