Inflation and an unrelenting global pandemic set the stage for a bear market in 2022. And a stock market pullback could slash the value of your retirement account and keep you in the workforce longer than planned.
On the flip side, you could have said the conditions were ripe for a bear market in 2021 as well. But the S&P 500 index did the opposite, rising more than 25% in the last 12 months.
Truth is, neither you nor I can predict the next bear market accurately. We can spot signs of trouble ahead, but there’s no telling how or when the stock market will respond. What we can do is prep our finances for any type of market climate. Start with the four moves below to protect your 2022 retirement plan from getting ravaged by a bear market.
1. Check your asset mix
If you are heavily invested in stocks or stock funds, your retirement portfolio will be volatile. This is because the stock market does experience broad corrections – that’s generally when stock prices are falling. In those cycles, most of your stocks will experience value declines.
Bonds and bond funds, however, respond differently to stock market corrections. They tend to hold their value and sometimes can even become more valuable when stocks are falling.
Increasing your relative exposure to bonds can add stability and resilience to your portfolio. The trade-off is that you’ll have lower growth opportunity. But if retirement is right around the corner, that trade-off may be worth it.
2. Add to your cash savings
Bear markets become problematic when you need to liquidate. Share prices are down, and liquidating locks in your losses. In a perfect world, you’d avoid selling your shares until the bear market ends and share prices recover.
Unfortunately, waiting out a bear market is tough when you’re about to retire. If you want to take retirement distributions, you generally must liquidate shares – that is, unless you have another source of cash on hand.
That’s why it’s smart to increase your cash savings as you approach retirement. The more cash you have, the longer you can delay those bear market liquidations. You may not have enough cash to outlast the bear market, of course. Still, the cash you have buys you time to plan your next move.
3. Project your Social Security
Your cash savings isn’t your only funding source outside of your retirement portfolio. You should also have Social Security income heading your way.
You can find a personalized Social Security projection by creating an account at my Social Security. Once you log in, you can view your estimated benefits at different claiming ages. You’ll see you can generate higher income by delaying your Social Security application.
Once you have an idea of your potential Social Security income, estimate how long your cash savings will last – without the supplement of retirement account distributions. If you can get by for a year or more on cash and Social Security, you’ll have a good layer of protection against a bear market.
4. Have a backup plan
In the vein of preparing for the worst, make a backup plan. If a bear market were to shrink your retirement portfolio by 30%, what would you do? You could delay your retirement, but there are other options, too, including:
- Transition to part-time work instead of full retirement.
- Downsize your home to reduce your living expenses.
- Relocate to reduce your living expenses.
It’s smart to create your backup plan before a bear market sets in. When times are good, you can think more clearly and make better decisions. And then, if the market does turn sour, you’ll already know what to do.
Bring it, 2022
You can hold on to your 2022 retirement plan in the face of a bear market by shoring up your finances now. Pull risk from your portfolio, beef up your cash savings, quantify your Social Security benefits, and devise a backup plan. With those moves, you’re ready for the year ahead. Let 2022 bring what it may.
