Retiring In A Bear Market

Retiring in a bear market

Oh wow, 2022 is turning out to be another crazy year. The stock market is in turmoil due to many factors. The S&P 500 index is already down over 10% and who knows where we will go from here. I suspect 2022 will be the bear year for the US stock market, but you never know. Things might improve for the rest of this year. Fortunately, a bear market is actually good for most of us because this is a great opportunity for the long-term investor. However, a bear market is bad news for one particular group of people – someone who recently retired or will be retiring soon.

*Originally written 2016, updated in 2022.

Studies have shown that retiring in a bear market is one of the worst things that can happen to your nest egg. This is because you have to sell some investments to fund your cost of living. Retiring in a bear market means you sell at the worst time and it’s tough to come back from that initial setback. A study from T. Rowe Price showed that the first five years are the most crucial period of your retirement. After the first five years, a bear market would still hurt, but it won’t impact your retirement as much.

Historically, a bear market occurs about once every 3.5 years and lasts around 15 months. You’re almost guaranteed to run into a bear market in the first five years of your retirement. So what can you do if there is a bear market during the first five years of your retirement?

Avoid selling in a bear market

The worst time to sell your investment is when the stock market is down. One way to avoid selling is to use the bucket approach. We can divide our nest egg into 3 buckets – short, intermediate, and long term.

  1. Short term bucket – cash. Retirees should keep enough cash to fund one to two years of living expense. That’s including social security and any other income you have in retirement. So if you spend $50,000 per year and receive $20,000 in social security benefits, then you would need to keep at least $30,000 in accessible cash. This cash bucket will help get you through the worst of the bear market.
  2. Intermediate term bucket – bonds. Bonds are usually much more stable than stocks in a bear market. Retirees can sell their bonds and use that income to replenish the cash bucket as needed. Another approach is to build a bond ladder. You can set up a bond ladder to mature every year with enough money to refill your cash bucket. Your bond bucket should have 3 to 5 years of living expenses. A bear market averages about 15 months, but it takes a while for the stock market to recover.
  3. Long term growth bucket – stock. A bear market is scary for retirees, but the stock market is great for long term growth. By setting up a cash and bond bucket, you can avoid selling in a bear market and wait for the recovery. Once the market recovers, you can sell some stocks to refill the short and intermediate term buckets.

The downside to the bucket approach is that your asset allocation will fluctuate quite a bit. Your bond allocation will drop in a bear market and you will need to rebalance when the stock market recovers. This approach also assumes that you have a good size portfolio. If your retirement portfolio is relatively light, it won’t make sense to put so much into bonds. Check your asset allocation to see if this bucket approach will work.

Reduce withdrawal rate

Another way to preserve your nest egg is to reduce your withdrawal rate while the stock market is down. Cutting back can be difficult, but it isn’t impossible especially if you just retired. Actually, there are quite a few things you can do.

  • Put off large expenses until the stock market recovers. Instead of taking 3 international trips, perhaps cut back to one and visit local sites instead. Put off buying a new car and keep fixing your old car for a few more years. Once the stock market recovers, you can splurge a bit to make up for putting things off.
  • Earn some income. A little earned income goes a very long way in retirement. Even $1,000 per month can make a huge difference. There are many things recent retirees can do to earn a little income.
  • Put off retirement until after the bear market. I hate to say this, but putting off retirement until the bear market is over is a very good option. You can keep investing while buying at a bargain price. I know this is not an option for some people, but it’s a good idea if you can put retirement off for a year or two while the stock market recovers.
  • Tighten your belts. T. Rowe Price recommends cutting your withdrawal by 25% and raising it back after the market recovers. 25% is a pretty big reduction and retirees will need to make some adjustments. The good news is that the reduced budget shouldn’t last too long and you only need to do this once. After 5 years, a bear market has less impact on your nest egg and you shouldn’t have to cut back.
  • Move to a cheaper location for a few years. I think this is a great option for someone who recently retired. I would love to take a few years off and go live in Thailand or Ecuador. Our cost of living would plummet in those locations. Portland is getting more and more expensive every year. Of course, if your cost of living is already low, you won’t benefit as much from moving to a more affordable location. *I visited Chiang Mai for 3 months and the cost of living is so cheap compares to the U.S. It’s great if you enjoy traveling.

Save more

Lastly, you can save more for retirement. If you think you need 3 million dollars to retire, then save 15% extra. That cushion will help pull your nest egg through a bear market. Beefing up your nest egg by 15% will be difficult, though. I bet the bear market will be over before you can increase your retirement portfolio by 15%. But if you keep investing through the downturns, you’ll come out way ahead in the future.

Retirement calculator

One way to keep an eye on your nest egg is to use a good retirement calculator. I like Personal Capital’s Retirement Planner and FireCalc. The Retirement Planner at Personal Capital is nice because all my portfolio information is already online. They can calculate using real-time data and give me feedback instantly. If my desired spending power drops below the projection, then I know I’ll be in trouble. FireCalc is great because it gives me a visual representation of how things could play out over the next 30 years. We’re still looking pretty good with both these calculators.

Of course, if your retirement plan is solid, you probably don’t need to check the calculator very often. Checking the stock market too often will give you an ulcer and it can make you doubt your plan.

Stay the course

The first 5 years of retirement are the most crucial. Most of us will run into a bear market during this time so we need to plan for it. The worst thing you can do in a bear market sells all your stocks and put the money somewhere safe. You will most likely sell at the wrong time and miss out on the recovery when it happens. Instead, you need to keep investing. Once you made it over this 5-year hump, your retirement should be much smoother.

If you need help, you should find a trustworthy fee-only financial advisor. They can help create a retirement plan for you and convince you not to sell at the worse time.

If the stock market drops 30%, could you handle it? Have you made plans for a bear market during retirement?

Passive income is the key to early retirement. This year, Joe is investing in commercial real estate with CrowdStreet. They have many projects across the USA so check them out!

Image credit: Rob Hurson

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Joe started Retire by 40 in 2010 to figure out how to retire early. After 16 years of investing and saving, he achieved financial independence and retired at 38.

Passive income is the key to early retirement. This year, Joe is investing in commercial real estate with CrowdStreet. They have many projects across the USA so check them out!

Joe also highly recommends Personal Capital for DIY investors. They have many useful tools that will help you reach financial independence.
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53 thoughts on “Retiring In A Bear Market”

  1. “Lastly, you can save more for retirement. If you think you need 3 million dollars to retire, then save 15% extra.”

    This is already accomplished with defining your safe withdrawal rate. But I can see how it makes people feel better to think that they are doing something more with two seemingly different things instead of one. I think this is where one more year syndrome often occurs as you get close to your pre-determined rate and you second guess your SWR.

    I personally have a 3.2% SWR target in mind. It was 3.5%, and before that, 3.75%. Perhaps it will be 3% (or less?) by the time I actually consider retiring.

  2. We have enough dividends rolling in that I don’t expect to need to sell anything in this bear market or the next. This is the power of having returns from the business, not the stock market.

    In fact, if prices go lower, I may even invest a little spare cash! Good luck to you Joe!

  3. “Buy when you are most afraid.” I like that advice I was once given. This is especially true for solid dividend paying stocks that have never cut their dividends, such as Johnson & Johnson and Exxon. I always recommend buying more of these types of stocks in retirement portfolios when dividend yields have gone up substantially.

  4. Great post on this. While I am still a bit away to FI I plan on doing actually that, particularly the cash bucket. I have come around to using the bucket system planning for retirement. If that means I have to work an extra year or two that is fine with me because I actually enjoy my job.

  5. Can’t say I’d like to go through a 40% drop (who would?), but with the heavy allocation of bonds, a 40% drop seems remote. What’s important is to develop the asset allocation that matches your risk tolerance…..and most importantly, it should be done before problems like 2016 arise.

    Look, no one likes a big drop (unless you’re shorting stock!) but the antidote is preparing for it, not trying to run from it when it happens (which it will eventually).

    Great post!


  6. “a bear market is really bad news for one particular group of people – someone who just retired or will be retiring soon.” Unfortunate and yet very true words. 🙁

    We are so close to our own retirement that we are carefully weighing when we should pull the trigger. We had not planned on pulling anything from retirement accounts (70/30 mix) for multiple years. So in that case things should work our ok for us. But why the heck does it bother me so much?

    I like your options to dealing with these market conditions. We will be using a combination of those in our strategy.

    • If you’re not withdrawing from your nest egg, then you shouldn’t worry about it too much. Maybe you’ll relax more once you retire. Good luck!

  7. I really appreciate these good suggestions, especially the bucket approach. As long as you can cover your living expenses for most of the bear market, you don’t have to worry. If you’re 65, you can pretty much count on your retirement lasting at least 20 years. So I think it’s good to keep a perspective, and stay the course with your growth bucket funds. Dividend stocks are a good long-term strategy. Invest in established companies with a long history of annual dividend increases (“Dividend Aristocrats”), reinvest the dividends, and be happy in 20 years or so.

  8. Joe,

    Good stuff.

    I agree it’s tough to retire right as a major correction or bear market sets in. Selling off assets on the cheap is getting things started off on the wrong foot. That’s why, like a few others, I focus on dividend growth stocks. Those that think you need to save too much or work too long are really incorrect. My portfolio yields about 4% right now, so that’s right in line with the generally accepted 4% SWR, except I don’t need to worry about selling off assets.

    The good news for many of us, though, is that a lot of this is a moot point since it’s not terribly difficult to make a few extra bucks from some type of work (online or otherwise). Those retiring rather early are in even better shape in this regard. Work and financial independence aren’t mutually exclusive endeavors.

    “I would love to take a few years off and go live in Thailand or Ecuador. ”

    I’m feeling that idea, Joe. Especially Chiang Mai, Thailand. It occurs to me that my projected dividend income for 2016 (about $10k or so) could just about cover a pretty modest lifestyle over there. Hmm… 🙂


    • Dividend is a great way to go especially if your expense is low. 4% is really good for dividend.
      Working a little bit after retiring is the way to go. You only make a little money to offset your expense. I’m pretty sure I will keep working part time for quite a while. Quitting working completely sounds like it could get a bit boring.
      Thailand would be great. You should check it out. 🙂

  9. “Studies have shown that retiring in a bear market is one of the worst things that can happen to your nest egg.”

    I assume that this article is primary related to 401K / stock investors that would be looking to retire in a bear market. I became FI through real estate investing and do not suffer the same risk. Granted, a bear market may hurt some of my tenants which could theoretically stress my business via extra vacancy and/or some rent default. But in general, real estate investors that have ample cash flow do not run into the same issues as stock market investors in a bear market and is one of the many reasons I like the rental business more than stock market investing for retirement.

    • Yes, I should have made it more clear. A bear market wouldn’t effect a good real estate portfolio much unless we have a huge recession.

  10. Excellent actionable steps! Now to implement this for my parents, I’ll have to buy some bonds for them for stability, although interest are low, I have to ride it out till maturity and be ok with the coupon rate. I agree with Allan that having lots of cash reserves are a great idea for those retiring soon, just to simplify things. I think I’ll go that route because I can’t see myself wanting to manage my investments later in life.

  11. Really good info. As you say, since a bear market happens quite often, its almost an inevitability that it will occur close to when you retire. For this reason, I would highly recommend keeping more than a year or two of living expenses in cash, or at least very short-term bonds. In fact, if you have 7 or 8 year’s worth in cash, then you really won’t need to do all those other things. You can eliminate most of the bonds part, because bonds in a low-interest rate environment are not a great deal.

  12. Thi is valuable info for me. even if I do not plan to retire yet, that is only for 2029.
    It is good that it highlights to have the cash available to avoid selling when the markets are really low.
    I am curious to learn from the retired bloggers on how to survive a bear. It will serve me good later on

    • Having cash during a bear market is great. You will be able to buy stocks at a bargain. The problem is you don’t know when a bear market is going to strike and you don’t want to keep a large cash position all the time. Good luck!

  13. “Put off retirement until after the bear market.”
    Yup, probably will be my first option at this point. I was hoping to pull the plug at the end of 2016, but that was assuming a (very) positive year for the stock.

    Great article, Joe. Lots of good suggestions here.

  14. I am just two weeks from giving formal notice after a 26+ years career and can’t help but watch the market closely these days (down slightly again this morning). We are utilizing the “3 bucket” approach you mention and have 3 years cash in our short-term bucket. I will be surprised if this is a long-term downturn, but am happy that we have the $$$ to ride out some bumpiness.

  15. I’m now in a transition period until retirement, still working full time but looking to be done within a few quarters. I think I can deal with a large stock market drop because I keep decades worth of living expenses in FDIC insured deposits. Of course if the entire financial system collapses, I don’t know what happens.

    I think my biggest risk is from fighting the last war– I felt burned by the V-shaped recovery in 2009 after having only deployed a small fraction of available cash. That turned out to be a bumper crop of returns that could (should?) have been a lot more. So I’m battling the urge now to not miss the boat this time and buy in quicker. The risk I see is that not all recoveries have to be V-shaped, so I might well be catching a falling knife this time. So yes I am buying again, but at the same measured pace I did at the end of 2008.

    Basically I don’t want to fall for the classic “don’t worry be happy!” scam:
    Love the comment by Lowezar!

    • I think your plan will be just fine. If the entire financial system collapses, we’ll have bigger problem than worrying about our stock. I assume the economy would recover at some point.
      It’s good that you plan to buy in when the market is down. What is your measured pace? Buy in every time S&P 500 drops 10%?

      • My normal stock churnrate is about a quarter of my W2 gross on the buy side. Times like now after an abrupt large dip in prices (like in energy/mining and biotech) I up that to whole paycheck. Back in late 2008 I was also putting in cash reserves, mostly with no research given the fast market action. I figured the shopping would be good for at least a few quarters if not years, but that sale ended in just a few months.

    • I’m already melancholy this year due to the record rain and El Nino…. The labor market still seems strong, but I feel like there are underlying problems. Many people still don’t make much enough to save.

  16. We have enough cash on hand plus dividends coming so that we won’t have to sell anything to cover our core expenses if we see a big drop.

    If the market drops 30%, we’ll still be able to spend what we have in years past without withdrawing more than 4% from our portfolio (our target). A 40% drop would put us slightly above a 4% withdrawal rate, but I’d honestly be looking at cutting costs and/or postponing spending with a 40% drop.

    Right now, for example, we’re searching for a good deal on a minivan. We hope to spend about $10,000 on one. If the market drops 40%, we might postpone this purchase to conserve cash on hand.

    Small changes and adjustments can go a long way in keeping our savings relatively intact!

    • It’s great that you have a plan in place. 40% is a big drop and it’s worth putting off big purchases until the market recovers. One or two more years wouldn’t make a big difference with your vehicle, right?

  17. This is great advice. I’ve long been an advocate of the “bucket” approach, but maybe a little more aggressive in short-medium term asset allocation.

    In any circumstance, a fair amount of available cash when you retire is always a good idea. Back in the days of decent-yielding CDs, this meant a CD ladder or bond ladder which matured at just the right time. Now, it’s probably a high-yield checking account (you can find 3-5% at a lot of credit unions), savings (1%+), or money market (1%+).

    In any sort of savings-based model, a successful retirement depends on four things: preparation, adaptation, luck, and timing.

      • Northpointe Bank (Grand Rapids, MI): 5%
        Consumers CU (Waukegan, IL): 3.09%
        Lake Michigan Credit Union (Grand Rapids, MI): 3%
        Great Lakes CU (Chicago, IL): 3%

        Hmm maybe it’s a midwestern thing. Either way, there are limits to the amount that they’ll pay interest on (usually between $5k-$15k) and you have all sorts of silly restrictions like having to check your balance 4 times per month and using a debit card 10 times per month. I don’t use my debit card 10 times per year, but in 2016, a 3% return on $15k at Lake Michigan CU is very appealing – guaranteed $450 gains.

  18. This is a very timely post as my wife and I are planning on retirement at the end of the year. Retiring in a bear market isn’t the worst thing in the world. In fact, calling it quits around the time where the market is leveling out and preparing to gain once again would be an amazing feat, but it’s also very, very true that we don’t want to touch our investments until things settle out. Right now we are focusing on padding our Ally savings so we can live out the next few years, perhaps, without withdrawing from our investment accounts.

      • The goal is at least 2 years of expenses from our Ally cash savings account. A lot of this will be determined by what we can sell our homes for this year, along with our general level of savings throughout the year.

  19. Hi Joe – I like the idea of reducing your withdrawal rate during a bear market. If you had unexpected expenses or if you had a reduction in pay at a job, you would cut back on things – so I think you naturally should cut back on your withdrawal during rough patches.

    That’s a great example of why people looking to retire early should also look at other avenues of passive income. Your blog is a perfect example of another source of passive income that can help cover some of your expenses. For me, I’m trying to build up on a handful of rental properties. You can’t keep all your eggs in one basket or you can really struggle during down times.

    — Jim

    • Early retirees definitely need more sources of income. We won’t be able to access social security and retirement funds until later so it’s crucial. Rental properties are a great way to build wealth. It can be a lot of work, though.

    • I agree with Joe that this is not a great plan. So does Ruth Davis Konigsberg in an article called “The Myth of ‘Retirement Planning”.

      Some important points that Ruth made:

      Americans think they can decide when to stop working. They can’t. Too many Americans cling to the idea that working longer is a viable solution to bridging the shortfall in retirement savings.

      According to a new Harris Poll conducted for the Nationwide Retirement Institute of 1,291 adults age 50 or older, four in 10 respondents say that they don’t expect to ever retire. The idea of working forever has no relation to reality. Of the largest group of pre-retirees ever tracked (the University of Michigan’s Health and Retirement Study) roughly 37% of those still working at age 58 ended up retiring earlier than they were planning.

      What forces these early retirements? Basic life events, most commonly some kind of health shock or diagnosis that makes people either unable to work—or wanting to spend their time doing something else. People get laid off, or the business they were working for shuts down. Then there are the family reasons: a spouse’s health problems, having one’s parents move in, having grandchildren.

      Surprisingly, of all the events that derail one’s plans, a sudden decrease in wealth, such as a loss in the markets, is the least likely event to disrupt retirement plans, according a recent survey by the Center for Retirement Research at Boston College.

  20. I left my primary career about two years ago and have all my retirement savings invested in high quality dividend paying stock. I live off the passive income generated by the portfolio and any additional active income I decide to generate. A bear market doesn’t really impact me as I never intend to sell my stocks, my chief concern being will they ever cut the dividend? In fact a bear market presents me with an opportunity to add additional dividend stocks at low prices/higher yields which I have been doing recently. I don’t sit on cash but I do have a line of credit in place in times of emergency. I also intend to spend all the active income that I generate on adventures for me and the family.

    • I think some dividend cut is inevitable. It just depends on how your companies do in the bear market. If earning drops 50%, it’s going to be tough to raise dividend. I’m interested to see how you come out of the next bear market with your approach. I don’t really like the line of credit, but I guess it works in some situation. Good luck in 2016!

  21. 40% off is a great opportunity for me to buy more stocks.
    I have learned my lesson from 2008 crash so when I retired I always kept five years expenses aside in cash so I can use it in case of crash and don’t have to sell stocks at low prices.
    My portfolio beside the cash is 50%/50% bonds/stocks and my plan is to move up to 20%/80% means to sell bonds and buy stocks in steps every time that stocks prices go down but to do it I’ll wait for a real crash, something like 40% to 60%.

    • 5 years of cash is great in a bear market. You can ride it out for sure. 50/50 is also a great ratio for recent retirees. How long do you have until you get out of the crucial first 5 years? Do you plan to make any changes after that?

  22. I read and comment on the Financial Independence sub of Reddit and I am frequently down voted when I comment on the benefits of investing in dividend stocks. I know that dividends can be cut or reduced in hard times but there will always be some cash flowing in.

    While I intend to have a cash bucket during retirement I am hopeful that I won’t have to completely rely on it and that the dividends will be flowing in to help me maintain the modest retirement lifestyle I plan on living.

    Right now I am in the accumulation phase so the bear is my friend.

    • I like dividend stocks too. They have done better than the market index when you look at the long term. I’m not sure why people would vote down dividend investing. The dividend income would offset your withdrawal so you don’t have to sell as much.

      • I think several studies have shown that people who focus solely on dividends are over-reaching in terms of how much they need for retirement. People who have a “100% dividends” strategy probably saved way more than they really need, delaying their ER date. I’d say this is probably why the suggestion is often downvoted

        • I see. I think you’re right about 100% dividends strategy. You have to invest LOT of money to be able to fund your cost of living. Our ~$300k dividend portfolio only covers a small fraction of our expenses.

  23. You ask, “If the stock market drops 40% in 2016, could you handle it?”

    Yes, I am retired and can handle it even though I wouldn’t be all totally pleased with this scenario. I likely have (I don’t pay that much attention) around $300,000 in dividend stocks so my net worth would go down by around $120,000. But I have hundreds of thousands in cash savings. What’s more, I should still have a fairly good residual pretax income from intellectual property this year (looks like over $100,000) so that I won’t have to touch any of my assets.

    Fact is, I have experienced several stock market crashes and come out okay, even when I went totally broke. So let the good times roll. “Waiter, can I have the most expensive steak on the menu, please? Don’t allow me to cheap out on the wine either!”

    • Good article on retiring during a bear market. Perhaps that’s why I try to focus on the dividend income from my portfolio, rather than selling stock to feed my family. Dividend income is more stable, predictable and reliable than the fickle nature of stock prices.

      It is a good idea to also have some cash reserves and some fixed income allocation. This is something I am personally slowly working on.

      Having some side income, can be very helpful as well. Actually, if one is considering retirement and the bear market strikes, it might be worth it to simply work for an extra year so that your cash reserves are replenished and you also take advantage of those cheap bear market prices on equities.

      Good luck in your retirement Joe!


      • Focus on dividend is a great way to go. We are doing that as well with our taxable account.
        Are you worried about dividend cut? It seems like it’s too late to sell after a dividend cut.
        Buying in during a down market is definitely the way to go.

        • To be honest, I am not.

          Dividend cuts should not be a problem, as long as the dividend portfolio is diversified. In an ideal portfolio with roughly 50 equal weight positions, each position would account for no more than say 3% of income or 4% at the worst.

          If I get a dividend cut, I can always sell, and reinvest the proceeds elsewhere.

          Of course, stock selection is paramount – I try to focus on companies that will be able to pay and grow dividends even during recessions. Don’t get all correct, but on average things have worked out pretty nice.


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