Retiring Into a Bear Market: Managing Sequence Risk

Retiring into a bear market can put even a well-funded retirement plan under immediate pressure. The danger is not only the decline itself, but having to fund spending from depressed investments—and making emotional decisions that lock in losses.

Derek Gabrielsen, CRPC® — Senior Wealth Advisor, and Tony Zabiegala, CRPC® — Senior Wealth Advisor, examine three retirement scenarios and the choices that changed the outcome. They discuss maintaining a reserve for portfolio-funded living expenses, using cash and short-term bonds before selling equities, adjusting discretionary spending, considering part-time income, rebalancing, evaluating Roth conversions during a downturn, and using annuity income when appropriate.

This episode provides a practical framework for stress testing a retirement plan before the next bear market arrives. It offers educational perspective on withdrawal strategy, liquidity, taxes, portfolio structure, and the behavioral decisions investors face during difficult markets.

Learn more at Wealthalyze.com

Transcript

SPEAKER_01 0:00

Imagine retiring, and the day that you retire, the market enters a bear market. 20% of your portfolio is wiped out. That can be one of the most frightening things that can ever happen to a new retiree. Today, we're gonna talk about how real people survived that situation and what they did that made all the difference.

SPEAKER_02 0:34

Tony the Tiger over here. Let's add in that uh let's add in that uh sound. So, um, so this week we're gonna talk about uh retiring into bear markets. So um, you know, like you alluded to in in the uh the intro there, um, it's it's the number one thing that's going to break your financial plan. So, you know, setting is being prepared for it uh beforehand is going to be obviously important. And um, we'll walk through a couple scenarios uh of kind of you know real life scenarios of what people have done uh and how you guys can learn from them.

SPEAKER_01 1:10

Right. So I I mean that the the you know if you're still working, it's not a problem, right? Right, because you're still saving, you're your dollar cost averaging in, and you got time on your side. Um, but if you retire, you're done working, you're done saving, you're done earning, and you're spending.

SPEAKER_02 1:24

Right.

SPEAKER_01 1:25

And the biggest detriment to any retirement plan is spending money from a portfolio that is depressed, yeah, down, right? So that's that's the one thing, right? And then it it's happened before. It's been a while since it has, but you know, 2000, you know, people walking into the dot-com crash, 2007, the financial crisis, um, and then 2022, you know, faced the worst bond and and stock combination in decades. They were both down. The one thing I will say though is there are bear markets that are fundamentally created, and then there are bear markets that are policy created, right? You know, such as like the a policy would be like the tariff board, right? Roll that thing out, and the market crashes 20% within a week, a week and a half, right? But the market rebounded within three to three to four months. A true bear market that is fundamentally broken, like with high unemployment, um, low economic data, like GDP's negative, like there's like people are losing their jobs, they don't, you know, like stuff like that, those are more of the you know, maybe 12 to up to 18 month correction to get back to even, is what I'll call it, right? Because something needs to be fixed, you know, whether they start lowering interest rates to stimulate growth, all of that stuff. This is one big, huge oiled machine. And to fix a fundamental problem can take a lot of, you know, take some time. Yep, for sure. Um, but the biggest things are is you know, we talked about the historic side and the psychological dimension nobody plans for is all right, you know, like they start becoming they're they're either gonna like start selling because they're panicking, they're gonna change their strategy, or they're gonna alter their lifestyle. And to be honest, most people don't do the latter. I always tell people like, hey, if you know we have all this stuff planned in your in your in your financial plan, um, if there is a problem, you know, maybe you skip a vacation, right? If we have a vacation budget built in. But you know, we haven't had to experience that in quite some time. Yep. Um, so the biggest things I say, sell, sell, sell, or hey, maybe we should get more conservative or whatever. So like we'll talk about those coming in to the next part. So let's talk about like three stories, D, um, you know, of what I just painted.

SPEAKER_02 3:59

So yeah, so you know, uh, story one, you know, we'll talk about uh someone retired in January of 2022. So Tony alluded to it there. Um, that was the first time since I believe the Great Depression that both the uh market stock market and bond market were both down more than 10%. Um so this person retired in 22 with $900,000 saves. Uh by June, that portfolio was down to $680,000, so a 24% drop. Uh they sold everything at the bottom, basically, locking in the losses. Um, and by the time she felt comfortable re-entering the market, uh the the stock market uh had already significantly uh corrected back to the upside. Um so you know, basically the lesson learned there is you know, moving into, you know, making huge plays, right? Selling everything and getting into cash um can can really be counterproductive to what you want to sell.

SPEAKER_01 5:01

This is the worst behavioral finance move you can make. Yeah. Because you are late getting out because you're like, oh my god, I lost 10% already. I I need out. So you sell relow, right? And then you're so scared and waiting for it to uptick, like you're missing the upside too, right? So you're you're abandoning, you know, like you're abandoning like staying out in the market, right? Right. You're trying to time the market. You're gonna be late getting out because you already lost money, and you're gonna be late because you're too scared to get back in. Absolutely that's story number one. Story number two. Um this is this is now a this is more of a success story. It's like creating a bucket system. Um and uh typically, you know, the bucket system is that's why we own bonds, right? Right. But now we we painted the picture in 2022. Guess what? It you know, stocks and bonds can also go down simultaneously. So let's keep that in mind. So I mentioned it earlier that you know a policy bear market could be three, four months. A fundamental problem can be up to a year and a half, maybe longer, right? So the the solution to this, creating the bucket is fine, have your stocks and have your bonds. But you having having a having your budget dialed in, your lifestyle, that's what I'm that's what I'm talking about. They got your social security, that'll continue to come. Maybe you got a pension, maybe you got you're getting income from an annuity or something like that. You have all these guaranteed. So the delta is coming from your portfolio. Why don't we like right now is a not a terrible time to be in money markets, not your checking account or savings account. We can put the money there, it's just gonna earn pennies on the dollar. Right. But we can find money markets that are paying two, three, maybe up to four percent that have high that are liquid. You know, I know that those exist at Schwab. There's certain mutual funds that we use to capture that, right? They're they're more liquid than CDs and things like that, and we can have the money very quickly. So having you know, up to maybe 18 months of your um, you know, of your delta is what I called it, right? Your your spending from your swab uh or from your uh your your retirement accounts is what we need to just have on the side. It's not it's going up very slow. If the market's up 20% and you're getting three, you're gonna be upset. But we are setting ourselves up so that we don't make your plan worse. So having 18 months of living expenses. So if that means, hey, I'm taking out three grand, you know, I'm taking out three grand uh a month, that's 36 grand times one and a half, one and a half years. So we're we're gonna be looking at nearly 50 grand. Right? 50 grand is just hanging out and let everything else do what it's doing. Yep, absolutely right. And then we don't touch it until there's a true breakdown in the market.

SPEAKER_02 7:56

Yep. So uh scenario three, and we're gonna um I got a bunch of points there, so we'll we'll hit them after scenario three. Um, the flexible spender. So so Tony mentioned, you know, maybe um, you know, skipping some things if uh if the market turn turns uh a bad way. So scenario three, you know, someone retired in 2022 again, uh 550,000 um and immediately faced a downturn in the market combined with 8% inflation. So didn't didn't mention that in the first scenario. Zoinks. Yeah. So again, there is um heavy psychological issues, you know, at play here. Um, but rather than selling everything, she took um a part-time consulting role for 18 months, earning just $22,000 per year, which covered most of her initial expenses. This is also a great scenario if um someone really wants to retire but is kind of on the borderline of their plan, uh, picking up a part-time job early in retirement. Uh, even with a small amount of income, um, that can really reduce pressures on your on your portfolio. Tony just outlined, you know, if you're spending three grand a month, you know, if you're earning um an extra twenty thousand dollars over that time period, it it's an extra twenty thousand dollars is you don't have to pull out of your portfolio.

SPEAKER_01 9:18

Yeah. Um I mean the downside on that is you just, you know, like you you gotta look at it as not a failure. Yep, right. Um, and and then you're you know, maybe this because if we're we're looking at 22 grand a year, this is a part-time job, right? Right. So, you know, like you're not sacrificing all of your time. It's probably something on the last resort, something you do not want to do. Right. But depending on the severity of you know how how depressed the the the stocks are and things like that, um, it's a solution. It's not the solution, right?

SPEAKER_02 9:52

Yeah, so partial retirement is not not a failure. It's actually one of the most effective tools out there to um either save a plan during a downturn or kind of get you into that full retirement mode. So definitely something to think about there.

SPEAKER_01 10:07

Yep. Um, all right. So again, the the the the playbook here is um, you know, how do we actually do this if you're retired into a down market? So, first of all, you know, don't don't sell your equities to fund your living expenses. We talked about that. You know, you want to exha exhaust cash and short-term bonds um so that you're not touching and locking in losses. So there was a a stat that we always did in our uh ret um our educational class that you know they took a 25-year period. I think it was from like 1995 to like 2000 or 2019 or something like that. Um if you missed the five biggest days in the market, your you your annual if you stayed invested, you earned as roughly a seven percent rate of return on an annualized basis. And it's probably a little bit higher than that. If you missed the five biggest days, your annualized rate of return went down to five and a half percent. It was almost like a one and a half percent difference. And you know, unfortunately, you know the the the silver lining or the double-edged sword of this is that the best days in the market typically come after the worst days. There you got that that rebound within two weeks. Yeah, it's it's crazy. So I just did a really quick kind of math. So if you had, you know, like say you're still you know working, you had 250 grand in your 401k, and and we got this 25-year timeline, right? Um, at 7%, 250 grand without even adding another dollar, just just you know, extended growth of the portfolio. 7% on 250 is roughly 1.35 million dollars. At 5.5%, it's nine hundred and fifty thousand dollars. The difference is roughly four hundred grand. You know, that's a lot of money for panic, for panicking, right? Right? So we have to be aware. Um, you know, history has been on our side where the market has rebounded. So being prepared for the rebound and and the duration of the rebound is the biggest takeaway.

SPEAKER_02 12:17

Yep, for sure. And part of that is uh rebalancing your portfolio versus just you know selling a bunch of stuff and sitting in cash. So that that goes into right what Tony was talking about there. So uh it can even be an opportunity, right?

SPEAKER_01 12:31

Some but again, yeah, I'm gonna play the other side of the table as like Tony. I don't want to sell my bonds because they're down the lease to put it in stuff that keeps on falling, right? So people are going to be scared to rebalance. Right. But rebalancing is part of it's part of the plan. It's part of the plan saying, hey, from day one, my my allocation is a 70-30 you know stock to bond mix. Well, if it goes to 60-40, you got to take that 10% and put it back into stocks for this to work because it's you know, getting off the script is another behavioral finance problem.

SPEAKER_02 13:11

Yep, absolutely. And it works the other way too, right? Just a quick aside, you know, if if the market goes up 10% and you're you know 80-20 um and you're just gonna let it ride, you know, you're kind of getting greedy and you can get bitten on the other side if there's a market downturn.

SPEAKER_01 13:26

Great point, D. Great point.

SPEAKER_02 13:28

So um uh step three, you know, uh turn turn treat the downturn as a tax planning opportunity. You know, I know next week we'll be talking about Roths again. So um, you know, Roth conversions work work great in down markets, right? You do the conversion with uh stock at a low point, get it into a tax uh tax advantaged account, and then watch it grow and all that upside is tax-free.

SPEAKER_01 13:52

Yep. Um, we talked about you know flex spending, delaying, you know, vacations, things like that. Um, and then another point would be um historical durations, right? When you retire, we do not buy a mattress, slit a slot uh a slit in it, and start shoving our money into it, right? You you're you you probably have a another 20 to 30 year time frame. We cannot we can get less aggressive, but we don't need to go completely cash, right? Because you're not gonna keep up with inflation. Right. That's the that's the whole key. Um the stock market has outpaced inflation, that's why we are involved in it. Right. So um you can't you can't just, you know, you just can't go complete conservative mode, right? Um, and then another another side step here is, you know, maybe this is a step six, is that um, you know, use some of your alternative investments. And I'll just say like an alternative investment to me for this situation would be, you know, if you have an annuity, you know, specifically like the fixed index stuff, the stuff that can't lose money. Um, you know, especially when you have an upturn, you lock in gains. So if you have an accumulation uh annuity, the ones that are are growing, you know, like a bond, somewhere in between a bond and a stock, uh, you you can access a 10% penalty free, right? Use that because we that those aren't going to be depressed because the floor is always zero. Yep, for sure. So let's let's take advantage of those 10% penalty-free withdrawals. Or if we have an income annuity and we haven't turned it on yet, let's turn that on to you know sidestep some of the um you know, dipping into the accounts if we don't have a cash reserve set up.

SPEAKER_02 15:38

Yep, absolutely. And I've had, you know, a quick point on that. I've I've had that conversation recently with some of my clients. You know, they're maybe they're taking withdrawals from their investment account. They have an annuity, uh, an income annuity that's been cooking for a while. And, you know, basically the play is well, you know, don't really need to do that now. The uh the market's kind of sustaining, you know, our our withdrawal rate. If there's a market downturn, we'll we'll turn that off and we'll switch to the annuity. Yep.

SPEAKER_01 16:05

Um, all right. So the takeaways, again, sequence of returns, the market goes up and the market goes down. I think we've been spoiled over the last several years. You know, when when the market's rolling over three, four percent, you know, I'm I get some panic calls. Um, I mean, we we haven't seen an in uh like an inner year, you know, plus over 10 this year yet. You know, and the average is 13. In an election year, it's even higher. I continue to say that in different episodes. So um that that's one thing. Uh the bucket strategy, flex spending, part-time work, um, those are other items. And um, you know, the the biggest risk is uh of a bear market isn't maybe the downward part of your portfolio, but it's how you react, the emotional side of it. Um and there are and again, we we have solutions for this. It's you know, we can find something that's cash, it's not gonna be fun, it's not gonna be sexy, it's gonna play that in that three to four percent range, but it's there for a purpose, right? And that's why we have that's why we build financial plans. Have your advisor build a plan where, hey, Tonya, we're gonna put in something that is more conservative, but it's for this scenario. Um, have you know that we do build these scenarios, bear markets, right? Entering retirement. We do it on an aggressive part where we build the plan, and the day you retire is the day you lose 20%. You know, I mean it could be that drastic, not in one day, but like over the course of a month of retiring. Yeah, that's a big freak out moment. But let's let's paint the scenario for that, right? So that we can can you survive that, right?

SPEAKER_02 17:44

Absolutely. And the and I I think I'll I'll sum up with, you know, prepare before it happens. You're always going to be better off having a plan and preparing for a downturn and making sure your portfolio is in the right spot for that versus reacting to a bad situation. So make sure you're prepared and you have a solid strategy down. So uh thanks for listening this week, guys. If you have any questions or comments, hit us up at info at swpconnect.com and we'll talk to you next week.

SPEAKER_00 18:16

The opinions expressed in the podcast are for general informational purposes only and are not intended to provide specific advice or recommendations for any investment. Legal, financial, or tax strategy. It is only intended to provide education about the financial industry. Please consult a qualified professional about your individual needs.