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5 Steps to Help Prepare Your Retirement Portfolio for a Bear Market

 As we’ve pointed out in other insights, the risk of a down market in the years preceding and early in retirement can be particularly damaging. Volatile markets can be a good reminder that it may be time for a check-up. This is true whether you think we’re in, or will soon see, a bear market.

If you fit this description, we share below a reminder of some principles we believe in for soon-to-be retirees, and five steps you can take now to help prepare your retirement portfolio for a potential bear market.

1. Don’t be afraid to tap gains.

It’s natural to want to stay on the market train and tap every last bit of return from a bull market. After riding investments up, investors have a tendency, we’ve seen, to not harvest gains. You’ll need to keep some growth investments—after all, it’s likely you’ll have a long retirement. But don’t be afraid to tap gains.

Rebalancing is the traditional approach. But what does it mean? It involves selling investments in your portfolio that have risen in value and shifting that money into other areas and investments in your portfolio that haven’t.

You can also rebalance into investments that have held their value and are likely to do so in the future too. We’ll discuss this in step 2. And rebalancing assumes you know what your “target” asset allocation—in shorthand, your mix of investments—should be. Many investors don’t. We’ll discuss this in step 3.

2. Set aside cash.

Where do you put your money, after tapping gains? Consider this wrinkle to rebalancing when you’re in or near retirement. Instead of boosting your allocation to investments that have fallen in value, consider shifting some money into to investments that have held their value, and likely will continue to do so in a bear market. Cash and short-term investments fit this bill.

We’ve written frequently about bucketing. It’s a strategy that involves investing two to four years of expected spending from your portfolio in cash and short-term investments. Then you invest the rest of your portfolio using a balanced allocation to stocks and bonds.

For now, a reminder: Make sure you have a dose of stability and liquidity now. Note, too, that because short-term interest rates have risen over the past couple of years, cash investments and short-term bonds are now paying some income, as opposed to zero income a few years ago. So cash has value as an investment too.

3. Revisit your asset allocation. And if you don’t have one, get one.

Another “tried-and-true” mantra that may sound helpful is to revisit your asset allocation, based on your time horizon and risk tolerance. But what’s the right allocation?  

Your situation may vary, of course. But for an investor within five years of retirement, or less than five years into retirement, we believe a portfolio with roughly 60% in stocks and 40% in bonds and cash investments is still the place to start. As you move through retirement, your target allocation usually will become more conservative.

What’s the right allocation for you?

Source:  Schwab Center for Financial Research. Note: Though we generally recommend that you shift to a more conservative investing approach as you approach and during retirement, your asset allocation still depends on your circumstances, tolerance for risk, spending needs, legacy goals, and other factors. Note also if you invest with or received managed investing advice from Schwab, your mix of asset classes and detail may differ from the models above. For illustrative purposes only.

You may have heard of the classic “100 minus your age” in stocks and the rest in bonds guideline. Like any guideline, it doesn’t apply to everyone. But it’s about right as a place to start, in our view, for a retirement portfolio. So consider starting there. If you need help to revisit your situation and allocation, consider using the Schwab Investment Profile Questionnaire or talking with a Schwab Financial Consultant or advisor.

How you invest when you’re 80 or 85 likely won’t be as important as how you invest now. If you live to golden old age and are fortunate enough to have experienced 10 or more years of a bull market in stocks, you may have flexibility at that point to tap gains and then invest more or less conservatively.

For now, take the time to revisit your allocation, make sure you have the right balance, and protect your downside. If you find yourself worrying about your investments when markets are volatile, chances are you’re in the wrong asset allocation.

4. If you don’t have a plan, get one. If you do, revisit it.

Do you have a retirement income plan? Is it in writing? If you don’t have a written retirement plan completed in conversation with a professional or advisor, consider getting one now. It should include all investments and assets you (and your spouse or partner, if applicable) have for retirement, including retirement plan balances, home equity, Social Security and other sources, along with a rough budget for expenses. It should include your asset allocation and reasonable projections for future returns from that portfolio.

From this, the plan will tell you two things: if you are on track, and how much you can spend. A good plan will include an income and distribution schedule as well, to help you know where your money will come from and when. The plan is a roadmap, not an absolute or certainty. But clients with a written plan report higher confidence in their investments and retirement, according to Schwab’s 2018 Modern Wealth Index. Along with your allocation, take time now to revisit—or create—your plan, working with a professional.

5. Consider insurance.

How much of your retirement portfolio and income depends on markets? How much comes from Social Security or a pension? Investing likely powered whatever success you’ve had in growing retirement assets—and we believe strongly in the power of investing to build wealth. But protections, including annuities that provide a way to save for retirement or turn your savings into an income stream, and may also include insurance features or riders, are worth considering. These can be a useful way to turn a portion of your portfolio into current or future income, and may provide optional features or protections to help weather a bear market. They’re not for your entire portfolio, but perhaps for part of it.

There are two primary types of annuities we’ll focus on here (you can learn more about these by talking with an annuity specialist):

  • Fixed indexed annuities: These can be used to protect a portion of your savings from market risk, and also provide potential for some market appreciation in the value if certain market indexes rise, depending on the terms and futures.
  • Variable annuities with optional guaranteed lifetime withdrawal benefits: These are a bit like a portfolio invested in the market, but with optional protections in the form of a rider, at an additional fee, to deliver and protect future income.

Certain riders may help shelter a portion of your investment in these solutions can help shelter a portion of your gains from a down market.  While annuities sometimes get a bad rap, they are neither a bad word nor right for everyone. In retirement planning, investments and insurance can work together. If the level to which your retirement is dependent on good market performance concerns you, ask questions and learn more.

What to do now

Most of what we’ve discussed here isn’t new. Like many things in planning, the principles repeat. You can refer to other resources and articles on retirement on Insights & Ideas.

Is your portfolio ready for retirement? How about a bear market? Times of stress and transition can be the best time to pull out a checklist and follow it. If you have questions or would like help with your portfolio, don’t hesitate to reach out to a Schwab Financial Consultant or trusted advisor. Call us at 800-355-2162, visit a branch or find a Schwab Financial Consultant.

What You Can Do Next

Important Disclosures:

The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.

All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed.

Examples provided are for illustrative purposes only and not intended to be reflective of results you can expect to achieve.

Diversification and rebalancing strategies do not ensure a profit and do not protect against losses in declining markets. Rebalancing may cause investors to incur transaction costs and, when rebalancing a non-retirement account, taxable events may be created that may affect your tax liability.

Investing involves risk, including loss of principal.

All annuity guarantees are subject to the financial health and claim-paying ability of the issuing insurance company. Neither Schwab nor its affiliates provides insurance guarantees.

Variable annuities are long-term investment vehicles designed for retirement purposes. The value of a variable annuity may be more or less than the premiums paid and it is possible to lose money.

©2018 Charles Schwab & Co., Inc. All rights reserved. Member SIPC.


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