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Published: Jun 30, 2022 9 min read

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No investor likes to see stocks fall. But this year's market downturn is especially bad news for the cohort of retirees and near-retirees with large portions of their portfolios tied up in stocks.

While the S&P 500 officially entered a bear market in June (down more than 20% from its previous record high), younger investors probably have no reason to panic. On the contrary, they now have an opportunity to buy stocks at low prices and let their portfolios grow over the course of decades as the market recovers.

The picture is bleaker for investors who are retired or plan on retiring soon — and whose stock-heavy portfolios have taken a big hit lately.

For years, investors grew accustomed to reliably handsome returns in the stock market. A long-running bull market was interrupted briefly in the early days of the pandemic, only to be followed by another stretch of soaring stock prices.

It's understandable, then, that many investors have kept a high portion of their portfolios in stocks, especially now that 401(k) accounts are steadily replacing fixed-income pensions as the default retirement planning option for private sector workers. Nearly three-quarters of the assets in 401(k) plans managed by Vanguard were invested in stocks in 2021, according to a recent report from the firm, up from two-thirds of assets invested in stocks in 2012.

Now that we're in a bear market and facing a possible recession, however, retirees who remain heavily invested in stocks through their 401(k) accounts are facing “uncharted waters,” says Richard Johnson, Director of the Program on Retirement Policy at the Urban Institute.

401(k) accounts aren’t foolproof

As 401(k)s become more popular and pensions slowly fade away, workers are assuming more risk when it comes to their nest eggs.

“To the extent that the money in these private sector accounts is invested in equities, workers bear the full risk of stock market fluctuations,” Alicia Munnell, director of the Center for Retirement Research at Boston College, wrote in a recent column.

Americans have cumulatively lost more than $3 trillion in retirement savings since stocks started falling at the beginning of the year, Munnell calculated. Pension plans and Social Security aren’t subject to that kind of risk (though both are vulnerable to inflation).

There’s also the fact that a market downturn hits mature portfolios harder than the smaller portfolios of younger investors. A 30% hit to a portfolio worth $20,000 means a loss (on paper) of $6,000, whereas the same percentage drop on a portfolio worth $800,000 would wipe out a whopping $240,000.

When your account balance is bigger because you’ve been saving money over decades of your working life, “even minor fluctuations in the market will swamp…. any effects of any additional contributions,” says Monique Morrissey, an economist at the Economic Policy Institute, a left-leaning think tank. In other words, it's much more difficult to make up that $240,000 portfolio hit with contributions over a short period of time — especially if the market remains volatile.

Of course, all this market angst comes with a major caveat. “This is an upper middle class problem,” Morrissey says. Only half of American families own stocks, according to the Federal Reserve’s Survey of Consumer Finances. Social Security is the most common form of retirement income, collected by 78% of all retirees, according to separate data from the Fed, whereas 30% of American households still collect a pension, according to a report from JPMorgan.

Target date funds can be risky, too

Target date funds, which contain both riskier assets like stocks and safer assets like bonds and rebalance to a more conservative allocation as a set retirement date approaches, have become increasingly popular 401(k) options. They are widely viewed as a way to minimize risk because of how they’re structured.

Yet the automated diversification in target date funds doesn’t make them a totally safe choice. They’re still vulnerable to the volatility and unpredictable nature of the stock market. On top of that, they can “[lull] people into complacency because a lot of these target date funds are actually quite aggressive,” Morrissey says.

The most popular target date funds have lost between 10% and 22% of their assets this year (due losses in equities as well as withdrawals), according to Morningstar data reported by CBS News. Between the last quarter of 2021 and the first quarter of this year, assets in target-date mutual funds fell by more than $100 billion, according to data from the Investment Company Institute.

The fixed-income assets in those target date funds aren’t without their own liabilities, either. “There's a lot of bond funds that are risky as well,” says the Urban Institute's Johnson, “particularly in an era of rising interest rates. Interest rates go up and the value of your bond fund is going to fall.”

Plus, like other retirement investment vehicles, target date funds are subject to timing risks. More on that below.

When to retire? Timing is everything

While it’s true that the stock market tends to rise over the long term, investors shouldn’t take that as a guarantee that their portfolio will grow during any given period.

“Stock returns do not average out over time,” says Morrissey, and the timing of your retirement has an enormous impact on the value of your portfolio and how long that money will last.

Vanguard provides this example: Two investors entered the market at the same time with the same assets, the same portfolio allocation and same withdrawal strategy. One retires in 1973, during a severe bear market. The other retires one year later in 1974, when stocks began to recover. According to Vanguard’s calculations, the 1973 retiree runs out of money after 23 years. The 1974 retiree maintains a sizable portfolio balance and winds up with money to leave behind in a will.

What to do if you need retirement cash in a bear market

While it’s disconcerting to see the value of your investment portfolio plummet in a matter of months, it’s worth remembering that the market is still positive over the long term. The enormous gains from the early days of the pandemic mean that the three-year annualized return of the market, “even including this recent dip, is still over 8% a year,” says Anqi Chen, the assistant director of savings research at the Center of Retirement Research at Boston College, “which is pretty good.”

While stock market fluctuations are out of your control, there is one obvious proactive step to take to ensure your money lasts longer. “If you're worried about retirement finances,” Morrissey says, “every year that you can stay working without undue stress is good.”

Delaying your retirement even by just a year or two could make a big difference when it comes to the value of your portfolio (not to mention the value of your Social Security benefits, if you can wait until age 70). That's true at any time, not just during a bear market.

If working longer isn’t an option (and it isn’t for many older Americans), it’s best to have a plan B for cash in retirement. Chen suggests prioritizing non-equity assets like bonds and cash if you need to tap into your retirement savings during a downturn, rather than selling stocks that have lost value in recent months.

Taking out a home equity loan can be an option too, as can downsizing your house, though sky-high home prices have made that strategy less effective in recent months. Asset manager Schwab recommends drawing down the interest and dividends from your investment accounts rather than selling the initial investment.

"Stay diversified," advises Johnson, and remember that stocks will eventually recover. "Don't completely abandon the stock market once you retire."

More from Money:

Is It Safe to Retire in a Bear Market?

What the Stock Market Selloff Means for Your 401(k)

Why Keeping Your Money in the Stock Market Is Especially Important Right Now