It’s easy to ride the highs and lows of the stock market when you’re still working. After all, the advice for what to do with your 401k in a down market is pretty standard: wait it out. The average bear market — usually defined as a dip of 20 percent or more — lasts for 13 months and bounces back in about 22. If you’re in your 40s or 50s, the best move is to take a deep breath, maybe brew some herbal tea and be patient.
But if you’re on the verge of retirement or already retired, you’ll need a different approach — or stronger tea. You’re at the point where you need to start putting that money to work and simply waiting a few years while the markets go through their natural cycle might not be possible. As such, using a more nuanced response to a bear market is necessary, one that neither results in panicked selling that costs you money nor leaves you unable to enjoy your retirement the way you want to. So here’s a closer look at how you should approach a bear market as a retiree.
If You Are Close to Retirement
If you’re still working but haven’t retired yet, the main method for preparing for a bear market retirement is adjusting your asset allocation before stocks start to fall — namely, moving money out of stocks and into bonds and cash the closer you get to the end of your career. If you have kept moving assets into bonds over time, you should be in reasonably good shape even when the stock market doesn’t play along with your personal timetable. In fact, dropping values on the stock markets will almost always mean the face value of your bonds will be rising, so you could be in a relatively strong position depending on how aggressively you’ve been shifting things around.
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However, if you haven’t prepared for the downswing, there are still workarounds. Firstly, as unpleasant as it sounds, you might consider delaying your retirement by a few years. Not only can you avoid selling stocks when the prices are down, but you’ll boost your monthly Social Security payments by as much as a third if you put off your last day.
If you’re not ready to do that, one calculated risk you could take is to focus on selling off portions of your bond portfolio. Since bonds are usually up when stocks are down, you should be getting a good price, and you can probably make up ground after markets recover by shifting money back into bonds when they’re down and stocks are back up. Just know that — in the worst-case scenario — this could backfire in a big way. Your asset mix is already stock heavy and you would only be making that worse in the short term, so an especially bad or long bear market could leave you in an even worse situation a few years later. When in doubt, talk to a financial advisor.