How to Protect Your Retirement Income From Market Downturns

FINANCIAL ADVICE | GUIDANCE | INSIGHTS | OBSERVATIONS 

You’ve heard the terms ‘Bear Market’ and ‘Bull Market’ thrown around on the news and in social media – but what is the difference between them (other than one having fur and the other horns)?

Today we’ll be discussing the bear market, how one could impact your retirement, and what you can do to prepare for a prowling bear.


Key Findings

A bear market is a market decline greater than 20% that lasts at least two months.

The last bear market, in 2022, was milder than typical in those that have occurred since 1929.

The two most common factors that cause bear markets are macroeconomic circumstances and investor sentiment.

Bear markets can keep retirees worried about potentially big losses from which they may never recover.

Yet despite these regular setbacks, the S&P’s total return since 1957 is more than 65,000%.


Basic Info on Bear Markets

A bear market is a market decline greater than 20% that lasts at least two months.

There have been 28 bear markets since 1928, with an average decline of 35% and an average length of 289 days. 12 of those have been since the launch of the S&P 500 in 1957.

So, if there is a bear market about once every 5 ½ years, you might ask when the last one was – and, as it turns out, during the first 10 months of 2022, the S&P 500 declined as much as 25% after the Federal Reserve hiked interest rates 7 times in a campaign to get prices under control.

Many different factors contribute to bear markets, such as recessions, macroeconomic circumstances, negative investor sentiment, and geopolitical events. If you retire at age 65, you’re likely to experience at least 4 market downturns during retirement.

The potential for big losses can cause retirees and those nearing retirement many sleepless nights.


Keeping Your Retirement Income Safe From Bears

Your retirement shouldn’t be an endless series of sleepless nights – it should be lived with a sense of security and optimism. There are ways to protect yourself against the effects of a bear market – and they start with having a plan.

We find that our clients’ confidence in tomorrow comes from careful income planning that covers their lifestyle needs, allows for emergencies, and includes room for investment and growth.

In simple terms, you can think of the three priorities of safety, income, and growth as three buckets. Dividing your assets into these buckets can help protect you from inevitable market downturns because your income should not depend on the market, but depend on math instead.


Let’s Do the Three-Bucket Math Together

For the sake of illustration, let’s picture a couple nearing retirement, with $1 million set aside. They want that money to last them 20 years, 30 years, or longer.

Here’s where math gets involved – let’s divide their savings into buckets.

The Safety Bucket

Whether in or out of retirement, you can expect unexpected emergencies to arise in life. You need to have money in reserve that’s allocated for that purpose. We call this an emergency fund.

Emergencies come in all shapes and sizes, and we ask our clients how much they need in this bucket to feel safe in case the car needs fixing, the home needs repairing, or some other emergency occurs.

The purpose of setting aside these monies is to provide immediate liquidity and cover short-term expenses without having to sell other investments at an inopportune time.

The right amount to set aside in case of emergency will be different for everyone, but let’s imagine our couple settles on $75,000. That gives us a good base from which to explore how to manage the rest of their savings.

Can My Emergency Fund Still Do Work for Me?

We recommend cash, money market accounts, short-term bonds, and other low-risk, highly liquid assets to store emergency funds.

The Income Bucket

When looking at the contents of this bucket, you’ll need to decide how much money per month is needed to maintain the lifestyle you desire.

You’ll need money to pay the bills, buy the groceries, fill the tank and cover other necessary expenses. You’ll also want to travel, eat out, buy clothing and cover entertainment expenses – basically, everything that goes into your current monthly budget.

Let’s say the couple in our hypothetical example settles on an income goal of $8,000 a month and expects to receive $2,000 each from Social Security (for a total of $4,000 per month). That means there’s a $4,000 shortfall between what Social Security provides and their monthly income needs.

One possible way of funding this shortfall would be to use some of their retirement savings to purchase a fixed index annuity that offers the potential for a predictable income stream regardless of what the market does. Fixed index annuities are designed to provide guarantees of principal and credited interest, as well as a death benefit for beneficiaries.

Alternatively, we may suggest intermediate-term bonds, dividend-paying stocks, balanced mutual funds, or ETFs to help generate a steady stream of income and help generate some growth (with which to replenish the safety bucket – if needed).

The Growth Bucket

With your monthly expenses taken care of, you can now calculate what you have left for long-term investment purposes.

While you must must always be careful with your retirement money, providing your income needs are taken care of and you’re confident you can deal with an emergency, your growth bucket allows you to aim at outpacing inflation.

Because this bucket can go down in value if the market drops, you should avoid dipping into it as much as possible. The last thing you want is to be taking money out of savings when – as happened in 2022 – the market is down by 25%.

Is There a Way of Balancing Growth & Security?

Many people believe that retirees must be strictly conservative with their money, but it’s OK to find ways to make your money grow without being overly aggressive.

Balancing growth with conservatism is possible, and we help many retirees to create a portfolio that may be slightly heavier on equities, slightly lighter on bonds, and may include stocks, real estate, and other growth-oriented assets.

These clients’ goal is to achieve higher returns over the long run, outpacing inflation and ensuring that their retirement savings last throughout their golden years.

Whatever your specific circumstances and needs, one of the great things about this three-bucket approach is that it allows you to take advantage of market growth without having your retirement savings tied to it.

Rebalancing periodically offers a structured way to manage retirement income and reduce the risk of outliving your savings.

We suggest that retirees rebalance (adjust the allocations and investments within each bucket) regularly, based on changes in their financial situation, market conditions, and time horizon.


Confidence & Clarity Cage the Bear

Our goal is to ensure that your retirement plan is designed to meet your needs, that it is dependent upon math and not the market, and that you can face the future with confidence and clarity.

Lastly, if you are approaching retirement and haven’t yet sat down with a financial professional who can help you to attain clarity and confidence in your financial plan, then do so as soon as you can!

If you have questions about your specific circumstances, or want to talk about developing a financial plan to effectively address your goals and aspirations, please get in touch.

We welcome the opportunity to chat with you and wish you every success in the future.

Sam Gullette & Erik Alexander

Sam Gullette, CFP®, CLU®
Certified Financial Planner™

‘My mission in life is to help people take control of their money and avoid financial stresses. My clients are successful professionals and executives, many of whom are compensated heavily with company stock. Together we maximize their wealth-building opportunities, minimize taxes, and make sure their family is protected if life throws them a curveball.’

Erik Alexander
Financial Consultant

‘I work with professionals and executives who are compensated through various forms of company stock.  They have more money than time and struggle to balance the key aspects of their lives. Their decisions affect others, and they feel a huge responsibility towards making them wisely. I enjoy helping them solve their complex problems, and being counted on for their and their families’ financial wellbeing.’

Disclosures:

The views stated in this letter are not necessarily the opinion of Cetera Advisor Networks LLC and should not be construed directly or indirectly as an offer to buy or sell any securities mentioned herein or as a recommendation of any kind. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed. Past performance does not guarantee future results.

All investing involves risk, including the possible loss of principal. There is no assurance that any investment strategy will be successful.

Rebalancing may be a taxable event. Before you take any specific action be sure to consult with your tax professional.

Index annuities are insurance contracts that, depending on the contract, may offer a guaranteed annual interest rate and some participation growth, if any, of a stock market index. Such contracts have substantial variation in terms, costs of guarantees and features and may cap participation or returns in significant ways. Any guarantees offered are backed by the financial strength of the insurance company, not an outside entity. Investors are cautioned to carefully review an index annuity for its features, costs, risks and how the variables are calculated.

Investing in mutual funds is subject to risk and loss of principal. There is no assurance or certainty that any investment strategy will be successful in meeting its objectives.

Investors should consider the investment objectives, risks and charges and expenses of a fund or ETF carefully before investing. The prospectus contains this and other information about the funds. Contact the issuing firm to obtain a prospectus which should be read carefully before investing or sending money.