“Retiring in a down market? A few more years of work can make a HUGE difference. Timing is everything when it comes to retirement.”
Retiring in a bear market can harm your portfolio for the long-term, even if the market eventually recovers.
According to a new study by SmartAsset, the early years of your retirement are extremely important. This is due to sequence risk which essentially means that when you’re taking withdrawals from a portfolio, the order – or the sequence – of investment returns can affect your portfolio’s overall value. Basically, account withdrawals during a bear market are more damaging than the same withdrawals in a bull market.
After 2022, which saw the S&P 500 drop nearly 20%, SmartAsset examined a previous bear market to see how starting drawing from retirement accounts in a down year can affect long-term investment savings and to what degree.
The study’s key variables:
- Two investors have $1mm in investment accounts in a year where stocks lost value (2001)
- Each investor withdrew 4% of the portfolio annually or $40k/yr.
- The investors each maintained an asset allocation of 50/50 = 50% in the S&P 500 Index and 50% in the bond market index
- The only difference between the investors was the date of their retirement withdrawals
- One investor began 4% withdrawals during the bear market while the other waited 3 years (2004) to begin 4% withdrawals
The difference in portfolio value after 3 years was huge.
At the end of 2004, the investor who took withdrawals in the down market (2001) had an account worth $833,934. But the second investor who waited to begin withdrawals until the market recovered, had an account valued at $1,332,513 – or $498,579 more.
“We found that those early down years are really impactful,” the Study found. “If you don’t do anything differently, the money does not come back.”
Of course, not everyone has the option to keep working three additional years due to health or life circumstances.
“It doesn’t have to be all or nothing. Continuing to work, even part time, or consulting, or a seasonal job, just to have some income so you can reduce the amount you’re taking out can help,” SmartAsset said. “Consider taking money from a short-term savings bucket so you’re not locking in investment losses. Or drawing down 2% rather than 4%.”
The least painful option is to delay big expenses until the markets recover.
“Push back the vacation, push back the cruise or safari you were hoping to take. Some expenses can be adjusted. It may not be fun to hear, though,” SmartAsset said.
We do not recommend people try to time the markets. But minimizing withdrawals for at least a year and re-evaluating again may be wise when faced with down markets.