6 Ways to Bear-Proof Your Retirement

While it may be tempting to retire in a strong economy, you should always be prepared for the next downturn. Learn how to do it.
By Richard Barrington

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Following the news that bull markets make people more likely to retire — and that doing so can put their future finances in danger — it’s important for savers to review how market returns can affect their retirement planning.

On one hand, it’s understandable why more retire during strong market conditions: People have a retirement savings target in mind, and bull markets can help more people reach those targets. The problem is, given the normal cycles of market returns, retiring at a peak could leave you vulnerable to the next bear market.

Ideally, you shouldn’t let recent returns influence your retirement planning too much. Keep these six things in mind when a run of good returns has you thinking you should retire a little early.

1. Don’t skimp on contributions if you get ahead of target

When market returns are strong, people tend to feel they can skip contributing to their retirement plans, because those returns seem to be adding to the portfolio fast enough. Market returns need to be viewed as cyclical, so good returns one year may have to make up for disappointing returns the next. Meanwhile, savings rates should be based on your long-term needs, not the current value of your portfolio.

2. Remember that an early retirement requires more funding

If you hit your retirement savings target a little early, you might need a higher target to account for the fact that if you retire early, you’ll have to live off those savings for a longer time.

3. Be sure to account for low interest rates

One of the biggest changes in retirement assumptions in recent years is the fact that interest rates, from bank rates to bond yields, are nowhere near their historical norms. That means it takes a bigger portfolio to produce an adequate amount of retirement income.

4. Don’t retire as soon as your portfolio reaches your target

If you hit your target during a bull market, hold off until your portfolio is large enough to withstand a normal market downturn — say around 15 percent.

5. Once you retire, don’t spend your excess returns

If you have already retired and your portfolio has a great year, don’t look at those gains as a windfall you can spend all at once. Just as is the case before retirement, investments need to be looked at as cyclical, so unusually high returns should be banked to make up for future periods of low returns.

6. Keep in mind that longevity is a form of risk for retirees

Normally, one would think of death as a risk, but when it comes to retirement planning, a long life is a form of risk because it requires more retirement funding. Make sure you’ve provided for your needs well past a normal lifespan, because you just might have to afford living a few extra years.

Once you retire, you no longer have the time or income to allow your retirement savings to make up for market downturns. Therefore, you want to make sure you build up a cushion against downturns before you retire — especially if it’s during a hot stock market that is due for a correction.

About Author
Richard Barrington has been a Senior Financial Analyst for MoneyRates. He has appeared on Fox Business News and NPR, and has been quoted by the Wall Street Journal, the New York Times, USA Today, CNBC and many other publications. Richard has over 30 years of experience in financial services. He has earned the Chartered Financial Analyst (CFA) designation from the Association of Investment Management and Research (now the “CFA Institute”).