Written by: Barbara Maietta, CFP®
“Great investing requires both generating returns and controlling risk. And recognizing risks is an absolute prerequisite for controlling it.” – Howard S. Marks
Impact of a Bear Market Early in Retirement
One of the key risks that retirees must plan for is the impact that a bear market just before they retire or early in their retirement can have on their retirement. If the market increases in the early years of retirement and faces down years later in retirement, their portfolio is well positioned to face that storm because of its early growth.
A down market just before or early in retirement can have a serious impact on your retirement security. This happens for two main reasons:
1.Your portfolio loses value due to poor market returns.
2.You’re still taking withdrawals – often adjusted for inflation – while your portfolio is shrinking making each withdrawal a larger percentage of the portfolio.
How Can You Reduce The Impact?
One way to lessen the impact of a bear market on your retirement portfolio is to avoid withdrawing from investments that have dropped in value. A common approach is the “two-bucket strategy”:
Bucket 1: Holds enough for your living expenses for the next 3–5 years, invested in low-risk assets.
Bucket 2: Holds money for years 6–25, invested for longer-term growth & income.
Bucket 1 is regularly refilled with income and dividends from Bucket 2 – so you’re not forced to sell investments at a loss. If additional funds are needed, sales from Bucket 2 should only happen when markets are strong, not during a bear market.
