When Retirees Should Sell Stocks in a Bear Market—and How to Do It

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Watching the markets gyrate in recent weeks, retirees may be tempted to cut and run. 

It’s no fun at any age to watch your portfolio decline, but the experience can be psychologically harder for retirees. When you’re withdrawing from your retirement account instead of contributing new money, you may feel particularly vulnerable to market declines. The S&P 500 has lost about 23% for the year and bonds, down about 15%, haven’t reprised their traditional role as a safe haven. 

“What’s really terrifying for people right now is that their money is evaporating,” said Beth Handwerker, a certified financial planner with James Investment in Beavercreek, Ohio. Rather than panic, she urges clients to take advantage of the downturn by, for example, considering a Roth conversion.

It’s best not to make any rash moves, like pulling all your money from stocks. That will just leave you out in the cold when the markets turn up again, which is usually sooner than investors expect.

But the usual advice to stay the course might not apply, either. Depending on your situation, it might make sense to de-risk your portfolio by reducing your stock allocation. Here’s how to determine whether that makes sense:

Check Your Portfolio Mix

Investors are best positioned to weather a market storm with a well-balanced portfolio. That could be some variation of the traditional 60% stock, 40% bond portfolio, which, although it hasn’t performed well this year, remains a stalwart. In a down market, a balanced portfolio will hold up better than an all-stock portfolio. The reverse is also true, but for retirees the downside protection is usually worth sacrificing some gains.

You might think you have a balanced portfolio, but if you set up a 60/40 portfolio years ago and haven’t touched it since, you may have more stocks than you bargained for, due to the blockbuster bull market that ran with only a brief interruption from March 2009 until the beginning of this year. A portfolio invested 60% in the S&P 500 and 40% in the Bloomberg Barclays U.S. Aggregate Bond Index at the beginning of September 2012 and left untouched since then would consist of 82% stocks and 18% bonds as of Aug. 31, 2022, according to

Morningstar

Direct.

“There are probably people who have pretty significant portfolio drift, if they haven’t paid attention to it,” said Jason Miller, partner at Crewe Advisors in Salt Lake City. If that’s you, sell some stocks and buy bonds to get back to your target allocation. 

Miller recommends setting parameters for your portfolio and rebalancing whenever it strays from them. Exact parameters will depend on your time horizon and risk tolerance, Miller said, but say your large-cap stock allocation was 30%: you could set thresholds of between 27% and 33% and rebalance whenever it falls outside that range. Other advisors recommend rebalancing on a set schedule, like at the same time every year. Whatever system you choose, it’s best to rebalance proactively instead of reactively in a down market, experts say.  

Verify Your Income Sources

Financial advisors recommend that retirees keep enough in cash that they won’t have to touch their portfolios in a down market. Withdrawing from a declining portfolio, especially early in retirement, will deplete your assets much faster than withdrawing in an up market. The term for this is sequence-of-return risk, or the bad luck of retiring into a bear market. The best way to counter negative returns early in retirement is to leave your investment portfolio alone and withdraw from cash.

Christine Benz, director of personal finance and retirement planning for Morningstar, recommends that retirees keep between one and two years’ worth of portfolio withdrawals in a high-yield savings account or other liquid vehicle. Note, that’s not one to two years’ worth of overall spending, since some expenses will likely be covered by Social Security or other income sources. You don’t want to keep too much in cash, since even with today’s higher yields it won’t keep up with inflation.

The end of 2021 was a great time for those approaching retirement to sell some stocks to fund a cash bucket, Benz said, as the stock market was up about 27% for the year. But if you missed that window and find yourself without an adequate cash cushion, it’s not too late to start building it. Dollar-cost-averaging is best known as a way to smooth risk on the way into markets, but advisors say it can also manage volatility on the way out. So you can gradually sell stocks over a number of months until your cash bucket holds between one to two years’ worth of portfolio withdrawals.

Another powerful way for retirees to counter a choppy market is to retain the option of working in some capacity, Miller said. That’s not always possible, for health or other reasons. But if it is, leaving your foot in the door to your former profession, or being open to employment elsewhere, may give you enough income to live on so you can leave your portfolio alone. 

Write to Elizabeth O’Brien at [email protected]