Price Perspective - In Depth

Retirement Investing

Retiring in a Bear Market

Judith Ward, Senior Financial Planner

Executive Summary

  • While the stock market has experienced positive gains for eight years, investors nearing retirement or those newly retired are concerned about the timing of a potential bear market and the effect on their nest egg.
  • By analyzing two time periods with significant bear markets at the onset of retirement, we found that an initial 4% withdrawal amount, increased to maintain purchasing power, produced good results in each scenario.
  • Inflation is an important factor to consider when planning for retirement spending. While inflation has not been a large factor in recent years, it can have a significant impact on spending needs and the portfolio.

This extended bull market has been bittersweet. Many investors have enjoyed growing account balances, but are concerned the market may falter when they retire.

Experiencing a bear market within the first five years of drawing down retirement assets can significantly increase the chance of the nest egg running out of money, especially if planning for a retirement horizon that could last decades.

To see how an investor would fare in this scenario, we analyzed two different time periods:

  • Someone who retired Jan. 1, 1973, the most recent 30-year period that started with a bear market.
  • Someone who retired in Jan. 1, 2000, who has already lived through two recent bear markets and is more than halfway into their retirement years.

We assumed a starting portfolio of $500,000 with an asset allocation of 60% stocks and 40% bonds throughout the entire horizon using the S&P 500 Index and the Barclays Aggregate Bond Index.1 We tested the “4% rule” assuming the investor started with an initial withdrawal amount that was 4% of the starting portfolio balance ($20,000 the first year). This amount was adjusted each year based on actual inflation2  in order to maintain purchasing power over the 30-year spending horizon.

We found that a 4% drawdown scenario, factoring in annual adjustments for inflation, held up for both of these time periods. We also found if a retiree curbed spending, the portfolio’s value increased.

Market Returns and Portfolio Balance Beginning in 1973

Past performance cannot guarantee future results.

Market Returns and Portfolio Balance Beginning in 2000

Past performance cannot guarantee future results.

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Retiring in a Bear Market
By analyzing two time periods with significant bear markets at the onset of retirement, we found that an initial 4% withdrawal amount, increased to maintain purchasing power, produced good results in each scenario.

Benchmark reflects the Bloomberg Barclays Government/Credit US Bond Index for the period 1973–1975 and the Bloomberg Barclays US Aggregate Bond Index from 1975 to the present.
Consumer Price Index, seasonally adjusted

Important Information

There are inherent risks associated with investing in the stock market, including possible loss of principal, and investors must be willing to accept them. Bond yields and prices will vary with interest rate changes. Investors should note that if interest rates rise significantly from current levels, bond fund total returns will decline and may even turn negative in the short term.

This material is provided for informational purposes only and is not intended to be investment advice or a recommendation to take any particular investment action. The views contained herein are those of the author as of February 2017 and are subject to change without notice; these views may differ from those of other T. Rowe Price associates.

This information is not intended to reflect a current or past recommendation, investment advice of any kind, or a solicitation of an offer to buy or sell any securities or investment services. The opinions and commentary provided do not take into account the investment objectives or financial situation of any particular investor or class of investor. Investors will need to consider their own circumstances before making an investment decision.

Information contained herein is based upon sources we consider to be reliable; we do not, however, guarantee its accuracy.

Source for Bloomberg Barclays index data: Bloomberg Index Services Ltd. Copyright© 2016, Bloomberg Index Services Ltd. Used with permission.
Past performance cannot guarantee future results. All investments involve risk. All charts and tables are shown for illustrative purposes only.

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