News & Insights

Will a Bear Market Destroy My Retirement?

Is it possible for my retirement to survive a stock market decline? That's a question that many people are asking these days, and there are reasons to be optimistic, especially for retirees and those planning to retire soon. It's a great time to take a moment and look at this issue.

It's understandable to consider the answer to that question as "Yes." Although the S&P 500 index experienced a decline in 2022, as well as most other indices, it's important to note that this is a "bear market" and presents an opportunity for potential growth in the future. The media is highlighting the challenges faced by those who are retired or planning to retire, but there are still opportunities to overcome these obstacles. This is a common occurrence whenever the market experiences a significant decline, but it's important to remember that the market also experiences frequent periods of growth.

It's reasonable to think that asset values will eventually increase, and declines in values can be seen as opportunities for growth. Although market declines are unpredictable, they are a normal occurrence and should be expected rather than feared. Although declines are a normal part of market behavior, it's important to remember that circumstances around each decline are unique. This is why we take into account the periodic stock market declines when constructing retirement models for our clients. If you acknowledge and plan for market volatility, you can create a solid and safe plan.

We are confident that individuals with a solid plan based on achievable goals and expectations, who remain diversified, patient, and disciplined, have no need to worry about the setbacks witnessed in 2022 or even more severe declines, as these will not significantly disrupt their retirement.  Which makes the answer to the question, "Will a stock market decline kill my retirement?" an almost certain "No."

There have been multiple studies over the years confirming the long-term value of broad portfolio diversification and asset allocation, such as William Bengen's study in the Journal of Financial Planning in 1994, or Craig Israelsen's 7Twelve Portfolio (7twelveportfolio.com) that we have referenced over the years. These studies confirm that 4-5% withdrawal rates are sustainable over a retirement of 25-30 years, tested through all kinds of market conditions. 

This is where a rebalancing discipline comes into play. When stock prices are significantly lower, rebalancing entails purchasing additional stocks. This purchase hastens the recuperation process.

Rebalancing, on the other hand, provides for the funding of withdrawals after equities rise by selling a little amount of stock at a profit. Rather than combating volatility, rebalancing capitalizes on whatever volatility occurs.  We avoid selling assets when they are down.  There is no need to forecast the market.

Bengen's and Israelsen's studies presumed that annual inflation-adjusted spending increases were constant. We have observed, however, that retirees only increase their withdrawals every few years, and their expenditure declines naturally as they age. This is because, when younger, most retirees are more active and spend more on activities such as travel and recreation.

In addition, people tend to be a bit more frugal with their spending when the stock market or the economy appears to be struggling. If a significant portion of a retiree's spending is on non-essential "wants" as opposed to "needs," they have some room for reduction.

Focusing on responsible spending and sticking to a solid plan can help avoid potential problems. It's great news that we have control over our spending level and the ability to stick to a sound plan. We can take control of our financial situation by ensuring adequate insurance coverage, implementing smart tax management strategies, and being mindful of the news we consume.

We've seen headlines like "a $5 Trillion Wealth Shock is cracking Americans' Nest Eggs", or anytime the Dow declines 200 points we get a big red "MARKET SELLOFF" on the financial tv news.  Remember, the media is not there to help you with your money, they exist to keep people watching and sell ads. It's great that you have the freedom to make decisions that are best for you and your unique situation without any outside influence.  Our existence is all about helping you do just that, and to help provide the financial peace you've worked hard for and deserve.

You have the power to control certain things. Focus on what matters. By investing instead of speculating, and focusing on your plan and long-term goals, you can make informed decisions and eliminate the stresses the media tries to create.