A Simple Solution for Retirees in Bear Markets

SmartAsset has published a new analysis that weighs the impact of current market conditions on the retirement experiences of multiple hypothetical investors, with the goal of assessing the power of reduced spending on a portfolio’s durability during bear markets.

As the analysis points out, equity and bond markets have stumbled dramatically in 2022, officially entering bear market territory. The conditions have left many retirees and soon-to-be retired workers wondering whether they will be able to adequately finance their golden years.

According to SmartAsset, for people in this position, there are a number of ways to approach this uncomfortable investment reality. The first is to have already prepared in advance for volatility by embracing a bucket strategy, in which the retiree segregates a portion of their accumulated assets into cash or cash-like investments sufficient to fund between one and three years of living expenses.

Armed with this cash bucket, the investor will not need to sell equity assets at a steep loss to fund current spending needs, thus giving the portfolio time to recover before it becomes the source of income. Such an approach is obviously best suited for those investors with substantial assets and access to advanced planning resources.

Another option for those with fewer assets — or those who have otherwise not adequately prepared their investment portfolios for a sudden downturn — is to attempt to work longer. This can be a powerful option, as well, but it is not always feasible or desirable, depending on the individual facts and circumstances.

Perhaps the method most directly in the control of any given retiree, as noted by SmartAsset, is the effort to cut down on living expenses in retirement. The analysis posits that lower spending in retirement is one of the most impactful ways to protect retirement savings during difficult moments in the market.

Cutting expenses won’t be easy for many, the analysis holds, but even fairly modest reductions in spending can make a big difference over time. In fact, according to SmartAsset, it may take as little as $250 or $500 in reduced monthly expenses to significantly extend the life of a given investor’s portfolio.

The Power of Lower Expenses

SmartAsset’s analysis considers three hypothetical retirement portfolios to determine the potential impact of spending reductions on long-term retirement outcomes. Each hypothetical retiree starts the analysis with $500,000 in accumulated assets, but their monthly spending rates differ by $250.

For purposes of simplicity, SmartAsset’s analysis assumes that the accounts in question don’t carry required minimum distributions and that the retirees are withdrawing only what is needed to live in retirement. The analysis also assumes Social Security payments won’t be interrupted in the future, and that the accounts are operated like Roth IRAs, in which no taxes are due upon withdrawal.