Those nearing retirement and those who have recently become retirees need to plan now for the possibility of a bear market. Here are two ways to do that, including one that goes against conventional wisdom. Getty Images By Michael Aloi, CFP | Summit Financial Resources Inc.March 23, 2018Contact Me Those planning to retire face many risks. There is the risk their money will not earn enough to keep up with inflation, and there is the risk of outliving one’s money, for example. But perhaps, the biggest risk retirees face now is more immediate: Retiring in a bear market. SEE ALSO: Want to Retire Abroad? 3 Commonly Overlooked Factors To put this in perspective, First Trust, an asset manager, analyzed the history of bull and bear markets from 1926-2017 and found bull markets — which are up or positive markets — lasted on average nine years. If that is the case, this bull market should be ending right about now, as it just turned 9 on March 9, 2018. Consider also the study found that the typical bear market lasts 1.4 years, with an average cumulative loss of 41%. Not to be all doom and gloom, but the chart below illustrates why the biggest risk retirees face right now is a bear market. It shows what happens to two identical $1 million portfolios, depending on the timing of bad stock market years. Age Market gain/loss Mrs. Jones Portfolio value Market gain/loss Mr. Smith Portfolio value Annual Withdrawal* 660.22 $1,160,000-0.07 $870,000 $60,000 670.15 1,272,200-0.04 773,400 61,800 680.12 1,361,2100.12 802,554 63,654 69-0.04 1,241,1980.15 857,373 65,564 70-0.07 1,086,7840.22 978,465 67,531 710.22 1,256,320-0.07 840,416 69,556 720.15 1,373,124-0.04 735,156 71,643 730.12 1,464,1070.12 749,583 73,792 74-0.04 1,329,5360.15 786,014 76,006 75-0.07 1,158,1820.22 880,651 78,286 760.22 1,332,348-0.07 738,370 80,635 770.15 1,449,146-0.04 625,781 83,054 780.12 1,537,4970.12 615,329 85,546 79-0.04 1,387,8860.15 619,517 88,112 80-0.07 1,199,9780.22 665,055 90,755 810.22 1,370,495-0.07 525,023 93,478 820.15 1,479,787-0.04 407,740 96,282 830.12 1,558,1910.12 357,498 99,171 84-0.04 1,393,7170.15 308,976 102,146 85-0.07 1,190,9470.22 271,741 105,210 860.22 1,344,588-0.07 144,352 108,367 870.15 1,434,659-0.04 26,960 111,618 880.12 1,491,852 114,966 89-0.04 1,313,762 118,415 90-0.07 1,099,831 121,968 * Adjusted for 3% inflation Mr. Smith and Mrs. Jones start off with the same $1 million portfolio and make the same annual $60,000 annual withdrawal (adjusted for 3% inflation after the first year). Both experience the same hypothetical returns, but in a different sequence. The difference is the timing. Mrs. Jones enjoys the tailwind of a good market, whereas Mr. Smith’s returns are negative for the first two years. Advertisement The impact of increasing withdrawals coupled with poor returns is devasting to Mr. Smith’s long-term performance. In the end, Mrs. Jones has a healthy balance left over, whereas Mr. Smith runs out of money after age 87. With stock market valuations higher and this bull market overdue, by historical averages, retirees today could be faced with low to poor returns much like Mr. Smith in the first few years of retirement. However, retirees like Mr. Smith still need stocks to help their portfolios grow over time and keep up with the rising costs of living. Unfortunately, no one knows for sure what the equity returns will be in the next year or the year after. This is the dilemma many retirees face. The point is to be aware of the sequence of return risk, illustrated in the chart above, and take steps now if retirement is in the immediate future. Here are two of the many planning possibilities retirees today can use to avoid the fate of Mr. Smith: Advertisement 1. Use a “glide path” for your withdrawals In a study in the Journal of Financial Planning, Professor Wade Pfau and Michael Kitces make a compelling argument to own more bonds in the first year of retirement, and then gradually increase the allocation to stocks over time. According to the authors’ work, “A portfolio that starts at 30% in equities and finishes at 60% performs better than a portfolio that starts and finishes at 60% equities. A steady or rising glide path provides superior results compared to starting at 60% equities and declining to 30% over time.” The glidepath strategy flies in the face of conventional wisdom, which says people should stay balanced and gradually conservatize a portfolio later in retirement. The glidepath strategy is a like a wait-and-see approach: If the stock market craters in the first year of retirement, be glad you were more in bonds. Personally, I would only recommend this strategy to conservative or anxious clients. My concern is what if markets go up as you are slowly increasing your stock exposure — an investor like this could be buying into higher stock prices, which could diminish future returns. An alternative would be to hold enough in cash so one does not need to sell stocks in a down year per se. Though not for everyone, the glide path approach has its merits: Namely not owning too much in equities if there is a bear market early on in retirement, which coupled with annual withdraws, could wreak havoc on a portfolio like Mr. Smith’s. Advertisement See Also: The 9 Investment Risks You Need to Guard Against 2. All hands on deck The second planning advice for Mr. Smith is to make sure to use all the retirement income tools that are available. For instance, if instead of taking money out of a portfolio that is down for the year, Mr. Smith can withdraw money from his whole life insurance policy in that year, so he doesn’t have to sell his stocks at a loss. This approach will leave his equities alone and give his stocks a chance to hopefully recover in the next rebound. The key is proper planning ahead of time. The bottom line Retirees today face one of the biggest conundrums — how much to own in stocks? With the average retirement lasting 18 years, and health care costs expected to increase by 6%-7% this year, retirees for the most part can ill afford to give up on stocks and the potential growth they can provide. The problem is the current bull market is reaching its maturity by historical standards, and investors who plan on retiring and withdrawing money from their portfolio in the next year or two may be setting themselves up for disaster if this market craters. Just ask Mr. Smith. There are many ways to combat a sequence of poor returns, including holding enough cash to weather the storm, investing more conservatively in the early years of retirement via a “glide-path” asset allocation, or using alternative income sources so one doesn’t have to sell stocks in a bad market. The point is to be mindful of the risk and plan accordingly. See Also: 6 Ways to Protect Your Nest Egg If You Fear a Bear Market Michael Aloi is a Certified Financial Planner with Summit Financial Resources Inc. in Fairfield, Connecticut. Securities and investment advisory services are offered through Summit Equities Inc. Member FINRA/SIPC. Financial planning services are offered through Summit Financial Resources, Inc. 4 Campus Drive, Parsippany, NJ 07054. Tel. 973-285-3600 Fax. 973- 285-3666. Any tax statements contained herein were not intended or written to be used, and cannot be used, for the purpose of avoiding U.S. federal, state or local tax penalties. If you require specific tax advice, please consult a qualified tax professional. Comments are suppressed in compliance with industry guidelines. Click here to learn more and read more articles from the author. This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA. 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