Should You Sell or Stay in the Stock Market if You Are Retired or Retiring Soon?

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Whether you celebrated this year’s arrival of a bear market or felt pain largely depends on how close you are to retirement.

If you’re decades away and just entering your prime investment years, the much cheaper prices give you an opportunity to accumulate a larger position.

But what if you’re only a few years away from retirement? Or worse: What if you just retired? Then what do you do when the stock market crashes?

In this article, I’ll tell you why how close you are to retirement matters, what you can do preemptively to soften the consequences when you get into the later stages of your financial journey and what to do if you get caught in a market low point just before retiring or early in retirement.


Table of Contents


Your Distance From Retirement: How Much Difference Does It Really Make?

Markets are never “up only” in price. It’s important to recognize that pullbacks and bear markets are inevitable. It’s just a matter of when they take place and for how long.

Once you’ve accepted that fact, your reaction to a major stock market downturn should depend on how close you are to retirement.

Far From Retirement? This Year’s Poor Stock Market Performance May Benefit You

If you’re in your 20s and 30s — or you’re decades away from your planned retirement age — your savings rate matters more than your ROI (return on investment). In other words, the amount and percentage of your pay that you put toward retirement every paycheck is more important than the market’s performance this year.

Stock prices were historically expensive entering 2022. A frothy market valued companies at higher levels than their actual earnings had supported in the past.

It’s difficult to predict the bottom of the market. But money expert Clark Howard advocates investing for the long-term through dollar-cost averaging. That means consistently putting money into your target date fund or whatever investment allocation you’ve chosen — regardless of whether the market is hot, cold or in between.

At these lower prices, you’ll be able to, hopefully, invest at price points that offer a bit more future upside. When the market does recover, the investing you do now will amplify your rewards.

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Experiencing a Bear Market in Middle Age Is About Avoiding the Big Mistake

If you’re in your 40s and early 50s — or you’re still a decade or more from retirement — your biggest goal is to avoid panicking.

The uncertainty and doubt in the media, among your family and friends, on social media — or by checking the value of your portfolio as it sinks into oblivion — can get overwhelming.

But you have plenty of time to wait out a market recovery. And you may have significant assets already set aside for retirement. For you, selling at a market low point could be devastating to your level of wealth in retirement.

Your most important goal, assuming your daily needs are taken care of, is to stay the course.

The Consequences of a Stock Market Decline Just Before or After You Retire

Starting past your mid-50s, and with increasing urgency into your 60s and during retirement, the timing of market price fluctuations becomes increasingly important.

CNBC illustrated this “sequence of returns” risk. It uses a hypothetical retiree who called it quits in 2000 with $1 million. This person’s plan? To withdraw $40,000 (4% of their portfolio) that first year and to increase their withdrawal amount by 2% every year to account for inflation.

The S&P 500 declined 37% from 2000-02 during the dot-com bust. After the financial crisis in 2007-09, a long bull market finally started. But because those rough early years, that person would have only about $470,000 left in their account by 2020.

Let’s say the long bull market had started in 2000 instead, and the bear markets occurred after. The same person would instead have $2.3 million in their retirement portfolio in 2020.

You can see what a dramatic difference that makes.

When stock prices fall during retirement, you have to sell more shares to generate the same amount of income. At the same time, as you sell during a downturn, you’re depleting your ability to capture the upside of a future market recovery.

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Ideally, you avoid this fate due to good fortune. But if you don’t, there are things you can do, both preemptievely and on the spot, to reduce the pain.


How To Prepare for a Stock Market Crash in Advance

As an Eagle Scout, I grew up learning a motto: Always be prepared.

Life doesn’t always fit into a neat box. But if given the opportunity, a little planning can greatly reduce your consequences during economic woes like we’re experiencing now.

There have been 27 bear markets since 1928, according to Hartford Funds. So we experience a bear market — a decline of at least 20% — roughly once every 3.5 years.

In other words, you can count on it happening almost every decade. And likely more than once.

Again, this advice is for those who are entering the medal rounds of the financial game. For our purposes, we’ll say that means you’re within a decade of retiring, or you’ve already retired.

Here are some things you can do to limit the impact of a really bad year (or few years) in the stock market.

1. Reduce the Risk in Your Portfolio

Generally speaking, as you get close to retirement, you want to keep less of your money in stocks and more of your money in bonds.

In other words, you want to reduce your risk and volatility.

If you hit the “easy button” for investing and get into one of Clark’s beloved target date funds, the fund manager will do this for you automatically. Otherwise you may need to hire an hourly fiduciary from the Garrett Planning Network or even a full-fledged fiduciary financial advisor.

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In the very long term, stocks outperform bonds. But don’t get complacent about your portfolio allocations as you get closer to retirement. You don’t want to strip away all risk. For most everyone, some exposure to the stock market is necessary to fight off inflation.

But you don’t want to risk the huge majority of your assets being in stocks once you’re relying on your investments for income, in case of a major market decline.

2. Set Aside Three Years’ Worth of Expenses in Cash

Clark says he keeps three years’ worth of his expenses set aside. That way, during market conditions like we see today, he doesn’t have to draw down on his investments to pay the bills.

However, the income you get from Social Security, your pension and your emergency fund can all count toward that three-year number. So if your expenses are $50,000 a year, you don’t necessarily need to have $150,000 in something liquid like a savings account.

According to the Schwab Center for Financial Research, from the 1960s to 2021, it took an average of 3.5 years for the S&P 500 to recover to its previous peak after a bear market.

It’s a good idea to start growing your emergency fund from 3-6 months’ worth of expenses to 1-3 years’ worth as you near retirement. Once you’ve retired, you can work toward this during times of extreme market strength (the end of last year and early this year would’ve been a great time to sell a bit extra and set it aside in cash).

Keep this money somewhere accessible such as a high-yield online savings account. You can consider putting at least a portion of the money into CDs, money market accounts, short-term Treasurys or short-term bond funds.

3. Carefully Consider When To Retire

I don’t know if everyone daydreams about retiring even from a relatively early age, but I know I have.

Having the financial freedom to do what you want with your time and your passions is one of the ultimate dreams. So I can’t blame you if you want to drop work — at least for the sake of putting food on the table — as soon as possible.

However, a careful, well-reasoned financial plan is critical to make sure that you’re giving yourself the best opportunity to survive financially, even thrive, for the full term of your retirement.

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Consider how long you may live. How much income you’ll get from your Social Security benefits. Inflation. Potential healthcare needs at an advanced age. The possibility of a market crash early in your retirement. How much wealth you’ve already accumulated.

It’s a great idea to talk to a financial planner before locking in your decision about when to bag work. Retiring before you’re financially ready can lead to heartache later in life.

According to Clark, people who are more than a decade away from retirement will have a bigger challenge than their grandparents, who may have gotten pensions.

“I can’t even emphasize enough how much more difficult it is to fund a multi-decade retirement not having a pension,” Clark says. Retirement is going to be phased. Instead of working five days a week, somebody will work two or three days a week. Because otherwise there’s just not going to be enough money to get through.

“You’ve got such a chance if you hit age 65 that you could easily live into your 90s. How are you going to pay for that? The way you make it more possible is you build those extra years in of enough income that you’re not depleting, whatever amount of money you’ve managed to save up to that point.”

4. Delay Taking Social Security

“The best time to take Social Security is to wait as long as you possibly can,” Clark says.

Avoiding the temptation to grab your Social Security benefits as soon as you’re eligible ensures your checks will be much fatter when you finally do start cashing them.

In addition, this gives you yet another lever to pull in case of a serious, prolonged bear market.

It gives you the option to claim your checks to avoid drawing down your investments too quickly at a low point. The extra income boost can prevent you from liquidating at the wrong time.


Planning Sounds Good, But the Market Is Way Down. Now What?

As of mid-July 2022, the NASDAQ is down 23.6% so far this year. The S&P 500 is also in bear market territory on the year, down 20.4%.

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Some individual stocks have fared much worse. Netflix, for example, is down 70.8%.

No matter how you’re invested, chances are that you’ve lost a significant amount of your money this year.

That can be especially worrisome if you’re near retirement or already retired. The more reliant you are on your investments for income, the scarier it can be.

Fortunately, you do still have some degree of control. Here are some ways you can improve your results, or limit the damage, while the market flounders.

1. Work Part-Time

“I’m full Debbie Downer. The hardest thing for people to hear, people who have had a retirement countdown clock, is that you’ve got to go back to work part-time,” Clark says.

“There is no magic elixir. There is no magic pill, particularly when you’re really heavily exposed to the market. You need that money to live on. You really can’t afford to tap it after a 20% decline because you’re going to run out of money. You’ve got to go get that part-time job. It’s how you deal with it. I don’t even see it as tough love. It’s just a fact.”

2. Revisit Your Budget: Income and Expenses

It’s time to revisit your financial plan (or to get serious about one if you haven’t done so).

First, figure out your income. How much money are you getting from Social Security? Are you one of the lucky few who has a pension? How much money have you planned on withdrawing from your investments every year?

There are calculators online that can estimate the probability that your money will last your lifetime, based on your burn rate (how much you spend each year) and some best- and worst-case scenarios with the market.

If you already have a set amount that you draw down from your investments each year, and you increase it each year for inlation, consider keeping the amount flat until the market rebounds.

You should also get as detailed as possible on your expenses. Which things do you need (money to pay taxes, to buy food and for healthcare)? Which things do you want (Netflix subscription, cruise to the Bahamas, steak dinners on Friday nights)? And which things do you dream about if you had unlimited funds (collection of classic cars, massive giving to charity)?

3. Reduce Your Spending

Now it’s time to be sensible. If you’re retired and relying on your investments for income, you are at risk right now of depleting your nest egg while the market is down.

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Look hard at any of your current expenses in the “want” or “dream” lists. What are you willing to sacrifice, at least for a period of months (up to a few years)?

Remember, any investment funds you don’t have to sell right now could be worth much more after the market recovers.

4. Look for Cash Elsewhere

When you’re in college and need quarters for laundry or McDonald’s, you may dig around in your car or under the couch cushions. It may not quite be that easy to pay for things in retirement. But it is possible.

If you have an emergency fund, especially with enough money for a few years’ worth of expenses, it’s OK to tap into it this year.

Now is also the time to hold that garage sale, downsize your house or get that old baseball collection appraised. If you’re due a tax refund in 2023, plan to file it as early as possible. Search for old, neglected financial accounts somewhere. Or perhaps you have unclaimed money in your name.

5. Forced To Sell? Be Smart About It

If you have to sell aggressively, and it’s going to reduce your retirement portfolio past the point of comfort, try to do it discriminantly.

Consider relying on dividends instead of reinvesting them, drawing down a little more on your bonds or selling stocks that have avoided going way down in value.

It may be a good time to carefully execute some tax-loss harvesting.

You can also prune investments that no longer look attractive for the future.

Keep in mind that most of these strategies are nuanced and can require extreme care. You can also solicit help from the Garrett Planning Network or a fee-only fiduciary financial advisor.

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Final Thoughts

We’re all human. We experience emotions. In many ways, it’s a beautiful part of life. But emotions can be a major enemy of prudent financial choices.

It may seem like stock prices will continue declining until you have nothing left. But history tells us they’ll go up again at some point.

Despite what it feels like some days, there are things you can control. Take stock of your circumstances and options. Revisit your plan. Make adjustments if necessary. And then carry forward knowing that you’re doing your part.

There will be better days in the stock market again at some point.


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