Now is the time when you really have to be careful about market slumps. Because the combination of investment losses and pulling money out for living expenses can depress the value of your portfolio. So much so that it may not be able to recover sufficiently even when the market rebounds.

There are two ways to protect yourself against the risk of going through your money too soon. One is to scale back your stock holdings enough to allow for modest growth. This can limit the damage from a slumping market. At age 65, a reasonable guide is to invest roughly half of your retirement accounts in stock funds. The remainder in bonds and cash. As you age, you should gradually scale back the amount devoted to equities, until it reaches 20% to 30% of your portfolio.

The second way to prevent a sinking market from sinking your retirement plans is to carefully manage withdrawals. If you want your nest egg to support you for 30 years or longer, you should draw no more than 4% to 4.5% or so of your account value initially and then increase the dollar amount of that withdrawal annually for inflation. This will roughly give you an 85% chance that your money will last you 30 years or more.

This is an estimate, though, not a guarantee.

The odds will be lower if you’re hit with years of subpar returns or a market downturn early in retirement. If the markets deliver solid gains, you could end up with a portfolio larger after 30 years than the one you started out with. It could also mean that your desire for security prevented you from enjoying retirement as much as you might have.

So you need to be flexible. If the markets head south early in retirement, you might want to scale back your withdrawals a bit. On the other hand, if you see your portfolio’s value begin to balloon, you might be more generous to yourself. 

My bottom line

The threat of a recession and a bear market wreaking havoc with your retirement plans can definitely be unnerving. Shifting assets around in a vain attempt to outguess the markets will likely create more problems then it will solve. Not to mention create stress for you. A better approach is to create a sensible long-term plan along the lines I’ve outlined here. Aside from minor adjustments, stick to your plan. In the years after the crisis passes, you’ll be glad you did. 


Keep in mind, this is just my opinion, I am not a financial adviser.