Can Retirees Survive the Next Bear Market?

By Bud Kasper, CFP®, AIF®

July 23, 2021

Can Retirees Survive the Next Bear Market?

Key Points – Can Retirees Survive the Next Bear Market?

  • Sequence of Returns Example
  • Defining Bear and Bull Markets
  • Looking Back at the Great Recession
  • How Frequent are Bear Markets?
  • 10 minute read

Can Retirees Survive the Next Bear Market?

Can today’s retirees survive our next bear market? In June 2020, I wrote an article titled The Serious Consequences of The Sequence of Returns in Retirement. Sequence of returns risk has continued to be a hot topic since then, as I also discussed it in a January 2021 episode of The Guided Retirement Show™.

For this article, we are examining how long a retiree’s money may last in retirement when factoring in both distributions and stock market volatility.

Today’s Comparison

For purposes of this post, we are comparing and illustrating two retirees starting retirement on the same date, with the same amount of money ($1,000,000), and taking out identical 5% distributions of $50,000 every year for 25 years. At the end of the 25-year period, you will see that both of our retirees, hypothetically Mr. Jones and Mr. Smith, had identical average annual returns of +6%.

Note: We did not include inflation or taxes in this comparison even though every retiree needs to understand the impact that both have on retirement success.

Setting Up the Example

In our example, we illustrate retiree #1, Mr. Jones, and examined his 25-year series of stock market returns. As you might expect some were positive and some negative. We did the same calculations for retiree #2, Mr. Smith.

At the beginning of the 25-year sequence retiree #1, Mr. Jones experienced positive returns for the first three years, then a modest -5% loss in year four, followed by seven more years of positive growth. Retiree #2, Mr. Smith, had the same 25-year returns as Mr. Jones but in reverse order. Note that Mr. Smith started his sequence with three down years, then three positive returns before another negative return in the 7th year.

To repeat, you will notice that both retirees begin with the same $1,000,000 balance, and both had the same 5% withdrawal amount of $50,000 per year. Both averaged 6% per year over the same 25-year time frame, but Mr. Smith ran out of money at age 83 while Mr. Jones enjoyed a wonderful return for the entire 25 years and beyond.

Importantly, pay attention to the difference in the annual balance at the end of each year. The change in value of the balances at the end of each year is a direct reflection of each of our retirees’ “sequence of returns”! This is the only factor that was different in our comparison.

Mr. Smith’s & Mr. Jones’s Hypothetical Investment Scenarios

Mr. Jones and Mr. Smith both started with a $1 million investment portfolio at age 65. Both portfolios experienced a +6% annual return that grew to the same ending value ($4,288,197) after 25 years.

Remember, each portfolio experienced the same annual returns only in the reverse order. In chart #1 there were NO distributions! The chart below illustrates their two different return paths that finished with the same ending balance.


Can Retirees Survive the Next Bear Market - Jones Smith Hypothetical Investments

After reading Chart #1 you notice that both of our retirees experienced the same average return of +6%, and both ended up with the same balance at the end of the 25-year period of $4,288,197.

Please remember that Mr. Jones’s annual returns are just the opposite of Mr. Smith’s.

Mr. Smith’s & Mr. Jones’s Hypothetical Investment Scenarios with Sequence of Returns

Now let’s look at how the “sequence of returns” can impact a portfolio’s value when taking distributions. In Chart #2, there are no changes to either retiree’s sequence of returns, but both are now taking distributions of $50,000 each year, which is 5% of their original $1,000,000 balance. This example shows distributions for 25 years or until they run out of money.

Notice that Mr. Jones begins taking withdrawals in an up market giving him the optimal environment to maintain his portfolio’s value longer-term (25 years). Unfortunately for Mr. Smith, he starts taking income in a down market and depletes his entire portfolio before reaching age 83.


Mr. Jones’s retirement account at the end of 25 years was approximately two and a half times what he started with and that’s not including the $1,500,000 that he took in 25 years of $50,000 in distributions.

However, poor Mr. Smith ran out of money at the age of 83, and therefore so did his retirement income. Remember, the only difference was the sequence of returns that Mr. Jones experienced versus Mr. Smith’s return sequence.

What We Learn from this Example

The takeaway is that retirees who experience little to no negative stock market losses at the beginning of their retirement had the greatest opportunity for long-term success. So is this the proverbial bull market versus bear market saga? The answer unfortunately is both yes and no.

The Definition of a Bear Market

The definition of a bear market is when the stock market has experienced a decline of -20% or more for at least two consecutive months and usually longer. Most bear markets are also associated with economic downturns.

The Definition of a Bull Market

Contrary to a bear market, a bull market is defined as a period when stock prices continuously increase by at least +20% or more after experiencing at least two successive monthly declines that exceed -20% or more.

The Last Bull Market

Our previous 10-year bull market began on March 9, 2009, and ended on March 11, 2020, with the advent of the novel Coronavirus, now better known as COVID-19. This bull run is now recorded as the longest bull market in history.

The Pandemic Markets

The COVID period has, in its recent history, the existence of both a bear market and a new bull market. The S&P 500 was crushed at the onset of the COVID-19 virus, as it lost -30.75% between January 1 of 2020 through March 23, 2020.

Looking Back at the Great Recession

As investors, we experienced a significant stock market retreat in the 2008/2009 Great Recession. It was reported that investors lost over $2 trillion in retirement savings accounts inclusive of 401(k)s, 403(b)s, and other types of retirement accounts especially IRAs. In the Great Recession, the S&P 500 lost – 47.71% from its October market high through January 2009.

It was this event that created the phrase “My 401(k) turned into a 201(k)”. While the comment was initially humorous, it wasn’t funny for those soon-to-be retirees who were planning on retiring in 2009, 2010, or 2011! In many cases for those retirees, the fallout was the fear that the market’s steep decline had caused “irreparable damage” to their future retirement success.

The Folly of the Target-Date Funds in the Great Recession

Retirees who invested their 401(k) plan contributions in “life cycle funds,” also referred to as target-date funds,” were shocked by the amount of loss they suffered as a result of the Great Recession. These target-date funds (asset allocation funds) were built under the perception that the date on the fund’s title meant that the closer a future retiree got to the stated date in the title of the fund the safer the fund would become as the portfolio would automatically shift its allocation to more safety.

For example, if you were planning to retire in 2025 and your 401(k) is invested in a target date 2025 fund (today in 2021) you would be expecting a reallocation of that fund to hold less in stocks and more in the historically less risky bonds or money market funds.

I believe this is a reasonable accounting of what happened to many future retirees that were right at or near their intended retirement date of 2010. The 2008 bear market experience as judged by the S&P 500’s performance from January 1 of 2008 to March 9 of 2009, when the market finally stopped falling, was a loss to the S&P 500 of -52.52%. Scary, right! Over half of S&P 500 stock values were wiped out in 14 months and nine days.

How Frequent are Bear Markets?

How often do bear markets occur? There have been 26 bear markets since 1928. There have also been 27 bull markets. What about stock market corrections? Corrections are defined as a drop of at least -10% and can extend to a maximum of -19.9%. If it reaches -20%, or more you are now in a bear market.

The antithesis to a bear market, as everyone knows, is a bull market. A bull market is born out of the ashes of a bear market. It’s designated as a bull when it rises at least +20% from a bear market low. Stocks on average lose around -36% in a bear market, and stocks gain on average +112% in a bull market.

Bear markets tend to be relatively short-lived, averaging 289 days or 9.6 months, while the average length of a bull market is 973 days or 2.7 years. The average time lapse between bear markets is 3.6 years. Our most recently recorded bull market that ended in March 2020 was the longest on record.

Bear markets have been less frequent since World War II. Between 1928 and 1945, there were 12 bear markets or about one every 1.4 years. However, since 1945 there has been 14 or about one every 5.4 years.

Do Bear Markets Always Come with Recessions?

A bear market doesn’t have to mean that an economy is in a recession. Since the crash of 1929 there have been 26 bear markets but only 15 recessions in that same timeframe. It is true that bear markets very often are associated with a slowing economy, but on the flip side it doesn’t mean that there will be an impending recession around the corner.

Now here is a statistic that is more than worthy of your attention! More than half, 56% of the time, the S&P 500 index’s strongest days occur during a bear market. In other words, as stocks start to grow out of a bear market 32% of the time the stock market’s best days occur in the first two months of a new recovery even before a bull market is officially recognized and declared.

The takeaway is that the best way to survive a bear market is to stay exposed in stocks. That said we investors are well aware that its’ hard to stay invested in stocks as you watch your retirement accounts decline.

Bear Market Lengths Are Always Unpredictable

As a CFP® and a 38-year veteran of portfolio construction and asset allocation and because our firm represents, to a great extent, folks who are already retired or just now entering retirement, I would not necessarily recommend what I just shared with you about staying fully invested in stocks in a bear market so you don’t miss out on the next bull market run.

The length of a bear market will always be unpredictable. Trying to buy stocks at a bear market’s bottom and hoping that you are at or near the beginning of a new bull market is, to say the least, very difficult. That’s why you’ll occasionally read that staying fully invested in stocks in both bear and bull markets is a mathematically sound strategy.

However, from a retirees’ perspective, this would probably be viewed as a failed philosophy. Especially when distributions and taxes are taken into consideration.

Use Appropriate Risk

A strategy of having to swallow 100% of the market’s downside to get 100% of the upside is too risky, in this planner’s opinion for retirees, especially when taking distributions as was demonstrated in our Chart #2 with the results Mr. Smith. Also, please note that taking retirement distributions during down markets is what I’ve defined as “double-negative compounding.” The meaning here is that your portfolio is pressured enough in a down market, taking money out simultaneously (distributions) only compounds the losses and challenges the retiree with how to make the losses back. Especially without adding more risk to their retirement account.

The Art of Financial Planning

Understanding how to best handle bull and bear markets becomes a mathematical and statistical art form. Comprehending how each asset integrates in your total portfolio as defined by your own personal tolerance for risk and then vetting it through both bull and bear markets is the first step in designing an appropriate asset allocation strategy. Determining the right amount of exposure to each investment selected for your portfolio is the next critical step and will define whether a specific portfolio is worthy of your retirement assets.

So, Can Retirees Survive the Next Bear Market?

In conclusion, we all recognize that bear markets can be agonizingly painful and detrimental to a successful retirement outcome as analyzed by our sad story about Mr. Smith. That said, history also tells us that markets, when viewed through the lens of different time sequences, almost always results in a positive outcome.

In the last 91 years, bear markets prevailed a meager 20.6% of the time. Stocks, on the other hand, have performed positively 78% of the time. Having the wisdom to mitigate portfolio losses during that 20.6% of the time the market is in a bear market and being able to reallocate the portfolio more in favor of stocks when stocks become the prevailing asset appears to be a prudent approach for both the protection, promotion, and sustainability of a retiree’s assets.

(For all you math wizards, we recognize that 20.6% added to 78% doesn’t calculate out to 100%. So to ease your mind I will disclose that 1.4% of the time the market was neutral or, if you will, flat to near flat.)

Needless to say, all retirees need a comprehensive retirement plan prepared by a CERTIFIED FINANCIAL PLANNER™ CFP® that takes into account not just what was discussed in this article, but also addresses tax strategies prepared by CPAs, Social Security, and Medicare integration, legacy planning and much more. We’re here to help! Schedule a complimentary consultation with a CFP® Professional by clicking here.

Bud Kasper, CFP®, AIF®

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The views expressed represent the opinion of Modern Wealth Management an SEC Registered Investment Advisor. Information provided is for illustrative purposes only and does not constitute investment, tax, or legal advice. Modern Wealth Management does not accept any liability for the use of the information discussed. Consult with a qualified financial, legal, or tax professional prior to taking any action.