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Bear markets are nerve-wracking for any investor, but they are especially so for people who are retired or approaching retirement. When you’re older, you have less time to recover from prolonged market downturns, putting added pressure on you to minimize losses and protect yourself financially.
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That doesn’t mean withdrawing stocks and putting all your retirement money into savings accounts. But that means investing with an eye on short-term stability, balanced assets, and reduced risk. It could also mean delaying retirement so you can contribute more to your retirement fund while the market corrects.
“For anyone retiring soon, a stock market sell-off is worse than it would be for younger investors,” William Parrott, president and CEO of Parrott Wealth Management in Austin, Texas, said in a blog post on the Mass Mutual website.
Here are some tips he and other experts recommend if you’re nearing retirement or are already retired.
1. Rebalance your portfolio
In bear markets, one of the first steps to take is to rebalance your assets to maintain the correct allocation of stocks, bonds and cash. This means reducing your exposure to volatile stocks and moving more money into stable assets like cash and bonds. You don’t want to get too conservative by parking all of your assets in cash, Parrot said. But when choosing stocks, focus on quality companies with strong business fundamentals, healthy balance sheets and steady earnings growth.
2. Boost your cash flow
Some financial planners recommend having at least two to three years of income set aside in the form of liquid assets such as cash, cash equivalents and short-term bonds that you can access during market downturns.
Certified Financial Planner Craig Toberman, founder of Toberman Wealth in St. Louis, told CNN Business he recommends shifting five years of income into liquid assets during bear markets. Say you have a portfolio of $1.25 million and want to withdraw $50,000 a year in retirement. In this case, you would want to keep $250,000 in cash. This strategy allows you to cash out during a bear market without having to sell stocks at a loss, Toberman said.
3. Leave your equity funds intact
In a recent column for AARP, financial author John Wagoner recommended that you avoid withdrawing money from stock funds during a bear market unless you have no other choice. The reason is that if you sell them at a low point, you leave yourself short of income to cover your losses.
“If your stock fund is down 15% and you withdraw 4%, your account will be down 19%,” Wagoner wrote. “Withdrawals in a bear market only make things worse.”
4. Look in TIPS
People nearing retirement or already in retirement should consider adding Treasury Inflation-Protected Securities, or TIPS, to their portfolios, according to Amy Richardson, Certified Financial Planner at Schwab Intelligent Portfolios Premium. As she told CBS MoneyWatch, investors can buy TIPS directly through the Treasury Department or through their bank or broker. Just keep in mind that investors can only buy $10,000 of TIPS per year per account, which limits the amount of inflation protection they can offer.
5. Don’t time the market
It’s nearly impossible to accurately predict when stocks are at their highest or lowest, although many amateur investors believe they can do this, especially in a bear market. As CBS News reported, research shows that people who exit stocks during a market downturn are likely to miss days when the market rises sharply, hurting long-term returns. Likewise, if you buy the drop thinking a stock can’t go down any further, you could suffer even greater losses if the stock continues to fall.
6. Take time for the market
This essentially means taking a long-term view by continuing to contribute to your retirement funds during a bear market.
“I’m a big believer in the adage that time in market is more important than market timing, and that means anytime you can put money aside to invest, that’s a good time. “, said Richardson. “If you have the ability to put more toward your 401(k) or other retirement accounts, that’s as good a time as any.”
7. Keep working
If you’re nearing retirement, it’s usually not a good idea to stop working during a bear market. As Mass Mutual noted, continuing to work and earn a living serves a dual purpose: you can keep pumping money into your retirement account through catch-up contributions, and you can give your portfolio investment time to recover from bear market losses.
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“If the majority of their income comes from invested assets that have suffered a significant loss, a deferred retirement may be necessary,” said Hiram Hernandez, a MassMutual finance professional at Coastal Wealth in Miami.
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