A bull market is a period of sustained growth, and a bear market is a period of sustained price decline. The specific rubric by which investors and financial experts determine exactly when a bear market or a bull market is happening varies, but the terms are frequently associated with 20 percent swings up (bull) or down (bear).
Although the terms bull market and bear market are most frequently used when describing equity markets, they can be applied to any market. Even real estate or commodities may exhibit bullish or bearish characteristics.
The exact attributes of a bull market and bear market vary depending on who you ask, but in simple terms, investors are generally optimistic about growth potential in a bull market and pessimistic in a bear market. The ability to spot an approaching bear market is an important skill for financial advisors who want to insulate their clients’ savings from avoidable losses due to overexposure in high-risk investments.
Can You Shield Your Retirement Savings from a Bear Market?
Bear markets can be hugely inconvenient for retirees who are relying on a 401(k) or IRA for their income. Particularly severe losses can be disastrous. However, the ever-changing nature of markets means no downturn lasts forever. A bear market today may be a bull market in a year and vice versa. You don’t have to take a loss by selling or withdrawing funds in troughs.
Sometimes that’s easier said than done. It’s not always obvious when a bear market will strike. If you’re a retiree managing your own portfolio, you might not realize your asset allocations are disadvantageous until it’s too late.
You also might not have cash savings that allow you to reduce your distribution to the minimum required by law (RMD) after the age of 72. There’s no requirement to take out more than that amount if you can avoid it. Relying on other assets or cash can give investments tied up in equities or funds in your 401(k) or IRA time to recover from bear market losses.
It’s also worth noting that Roth IRAs, which are retirement savings plans funded with after-tax dollars, don’t have required minimum distributions.
An investment advisor might recommend closely monitoring your portfolio mix and rebalancing your risk exposure based on current market trends. A retirement planner at Fullerton Financial Planning would be happy to sit down with you, review your assets and provide advice on ways to reduce the impact volatility or downturns have on your portfolio.
How you take your RMD might also vary based on whether there’s a bull market or a bear market. As long as your RMD is distributed before December 31, you won’t incur any penalties. If you’ve just turned 72, you may be able to defer your first RMD until April of the next year.
The right strategy depends on your age, expenses, risk exposure and the size of your nest egg, among other potential factors. It’s often beneficial to speak with an experienced financial advisor when determining the best course of action for your situation.
Should You Keep Working?
Soon-to-be retirees often must make tough decisions if their planned retirement target date falls on the eve of a burgeoning bear market. It may make sense to work through the downturn so you don’t need to begin draining your investment assets when they’re underpriced. Although it can be disappointing to delay retirement for a year or two, it may have a significant impact on your retirement income in the following decades.
Deciding When to Take Social Security
You might reconsider when to begin taking Social Security if your nearing retirement in a bear market. Social Security benefits have several different rules retirees can use to their advantage based on their own financial situation and the market. You can technically begin claiming Social Security at 62 instead of 66 or 67, but your benefit will be permanently reduced. Delaying the benefit past your normal retirement earns beneficiaries delayed retirement credits, which can mean an eight percent per year increase in your benefit up to the age of 70.
Alternative Cash Options to Cushion a Retirement Savings Distribution Drought
Reducing your retirement savings distributions doesn’t necessarily require you to accept a lower standard of living. There are a variety of potential options, even if you don’t have cash savings to cover the entire length of a bear market. HELOCs and some cash value life insurance policies might offer a way for you to pay your bills without needing to dip into your retirement accounts more than necessary.
It’s likely in your best interest to speak with a retirement planning professional before making any decisions that could affect your financial future.
Speak With a Phoenix Retirement Planner or Financial Advisor
At Fullerton Financial Planning, we’re acutely aware of how distressing a bear market can be for retirees. Our investment management and financial planning professionals are in the business of helping retirement savers plan for the unforeseen.
Call our team at (623) 974-0300 to discuss your unique situation.
