5 Tips for Retirees Dealing With a Falling Stock Market

What should you do if you’re retired and the stock market keeps dropping? Retirees — and everyone else — experienced a taste of that just a short while ago when the S&P 500 plummeted in December 2018, marking the worst December since the 1930s. Volatility is part of investing because markets are cyclical, frequently rising and falling. So even though the market headed up again in early 2019, retirees must be prepared to brace for a falling market.

Since 1950, there has been a stock market correction of 10% or more every 1.86 years, on average. And since 1975, investors have seen six corrections of 20% or more. Even with these corrections, the stock market gains an average of 7% over the long term. But that’s an average; meaning the good times balance out the down months or whole down years. Here are five tips to help you face times when the stock market is down while you’re retired.

Stock market chart, showing undulating graph lines.


1. Plan rather than panic

What should retirees do if the markets start falling and the decline lasts long term? Follow one of the stock market’s most golden adages: Don’t panic.

Panic selling doesn’t help anyone avoid being ravaged by a sinking market. Remember, no one can time the market or predict market downturns with any success. Panic selling could result in your unloading shares at precisely the point when the stock enters a long-term bull run — and hurt your portfolio’s chance of benefiting from the upside. Even in the short-term, if you sell 100 shares of company X in a panic only to see the price soar the next day, you lose your chance to make up the losses.

The antidote to panic is having a plan. Investors of all ages need to plan, of course, but it’s even more important for retirees. Retired people need to set up a plan to prudently protect their portfolio from bear markets, while maximizing exposure to robust and growing markets as much as possible.

Younger people can build portfolios heavily invested in stocks because they have a very long-term horizon for their returns to recover from bear markets and keep on ticking upward. A 25-year-old investing for retirement has 40 years left to invest in the stock market — and may have 60 years or more. A 70-year-old stuck in a stock market correction doesn’t have the same chance of recovering losses.

The other reason it’s a bit different for retirees? If the start of your retirement coincides with the arrival of a bear market, it can have a long-term negative impact on your retirement portfolio.

The 4% rule is a widely used benchmark of how much you can safely withdraw from your retirement savings each year without running out during your lifetime.

Using this rule, let’s illustrate how a drop in the market impacts the income of retirees: You’ve saved $250,000 in stocks for retirement and you plan to withdraw 4% annually, or $10,000, in retirement. But if a 20% bear market occurs in the first year, suddenly, $50,000 is snatched from your accounts. Your portfolio nest egg now stands at $200,000, and your annual 4% withdrawal is just $8,000. If you’re caught in a multi-year bear market and your stock portfolio drops 20% again, it will stand at merely $160,000. That annual 4% withdrawal would get you only $6,400 per year — far less than your initial nest egg would have provided.

Plus, your portfolio erodes in value during a bear market. A bull market may start after a multi-year bear, but any gains are now taking place on a much smaller base amount and you have a shorter time frame for your portfolio to grow.

Now, it’s possible to raise the annual percentage withdrawal from 4% to 4.5% or 5% during a down market, but if you withdraw 6% or more from your nest egg each year, you run the risk of running out of money during retirement.

The original benchmark was set at 4% because it would make the money last 30 years, assuming a portfolio invested 60% in stocks and 40% in bonds. A withdrawal of 6% or more could mean your portfolio dwindles too far for comfort as your retirement progresses.

2. Reallocate your portfolio

A protective plan reallocates your portfolio to become less subject to the stock market as you grow older and proportionately more invested in fixed-income investments like bonds and bank certificates of deposit. The latter offers fairly steady yields that are more stable than the stock market, and investing in them helps protect your portfolio from volatility. A mix of stocks and fixed-income investments allows you to also enjoy gains made in the stock market when they occur while being insulated from wild downward swings.

A widely used portfolio reallocation method is to subtract your age from 110. The resulting figure is the maximum percentage of stocks you should hold, with the rest of your portfolio allocated to fixed-income.

A 25-year-old, for example, should hold 85% of their portfolio in stocks and 15% in fixed income. Through reallocating properly, by the time they retire at 66, the portfolio would be 44% invested in stocks and 56% in fixed income.

It’s a wise idea to reallocate regularly. We’re in one of the longest bull markets in history, but a bear correction can’t be ruled out at some point in the future.

But what if you’re already retired and your portfolio is largely in stocks? What if the 4% rule doesn’t give you the income you anticipated, but you’re worried about raising the percentage? What if the market is sinking lower as you read this?

3. Hold your spending at an even keel

While many people dream of traveling in retirement, it’s wiser to hold your spending to a minimum in a down market. Actively monitor your expenses to see where they can be negotiated or axed altogether.

Retirees often experience large increases in their basic living expenses, especially for healthcare and energy (heating, cooling, and transportation costs).

Because of inflation, keeping expenses flat might mean belt-tightening in other areas of your budget. Historically, inflation runs at just over 3% annually, on average. Retirees who find their money isn’t going as far as they’d hoped should consider downsizing, or even moving to an area with a lower cost of living to save on expenses.

4. Maximize your Social Security benefits

People become eligible for Social Security benefits at the age of 62, but if you choose to retire then, you’ll receive less than you would receive by waiting until your full retirement age (FRA).

The FRA for people born between 1943 and 1954 is 66 and then rises incrementally for people born after that. (Look here to find your own FRA.) Social Security benefits, on average, rise 8% per year until the age of 70 and then stop rising. If you can start claiming your benefits at age 70, rather than early at 62 or on-time at your FRA, your monthly benefit will be higher for the rest of your life.

5. Work, at least part-time

An increasing number of retirees are working, at least part-time. About 19% of senior citizens worked full-time or part-time in 2016, a 50% increase from 2000.

Earning wages from part-time work allows you to withdraw less money from your retirement nest egg each year. There are many gig economy jobs that need workers and you can surely find something that suits your passion between finding random jobs like tutoring or gardening on TaskRabbit, driving for Uber or Lyft, or pet sitting on Rover or Wag. It may also be possible to consult in your field and you can start by seeing if past employers need help. You can get creative to make your retirement as enjoyable and as secure as possible. 

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