Insights

Bear Markets Are Not Likely To Ruin Retirements

10.10.23

When looking at the stock market, it is important to remember that historically the American market has always recovered during a Bear Market period and that drops in the S&P 500 have been temporary declines, not permanent losses. If you can keep those key points in mind, it is much easier to recognize that bear markets (a sustained stretch when investment prices are falling) are not likely to ruin retirements long-term – but bad investor behavior can.

The Fear of Running Out of Money in Retirement

Most people have concerns about running out of money in retirement because financial planning involves adequate savings and participation in the markets. The markets are inherently volatile and may be unpredictable. These concerns may cause fears about what a bear market will do to a retiree’s portfolio, like:

  • Avoiding a falling market is important to achieve investment success.
  • Making changes to a portfolio before the market worsens is necessary to meet goals.
  • A bear market will ruin retirement portfolio.

But, these concerns may be reduced by properly managing the combination of net assets and spending, which are usually significant parts of a good retirement plan.

Consider the hypothetical case of a retiree managing their own money in a tax-deferred account on a total return basis whose working career ended in December 1999:

  • Age 65, Plan to age 95
  • 60/40 portfolio (60% stocks using the S&P 500 Index1 as a proxy and 40% bonds using the US Aggregate Bond Index2 as a proxy), rebalanced annually3
  • 4% initial withdrawal rate, then adjusted annually for inflation

A retirement that started in December 1999 took place in one of the worst extended periods of stock market performance in American history. Recall the S&P 500 was cut in half – not once but twice – in the next nine years. And after 13 years, the price of the S&P 500 was lower than at the start of retirement (See Exhibit 1).

1The Standard & Poor’s 500 Index (S&P 500) is a broad index that is neither a specific investment nor a group of investments and cannot be invested in directly. Rather it is an unmanaged group of securities considered to be representative of the stock market in general. It is a market value weighted index with each stock’s weight in the index proportionate to its market value.

2The Bloomberg US Aggregate Bond Index is a market capitalization-weighted index that is neither a specific investment nor a group of investments and cannot be invested in directly. Rather, the securities in the index are weighted according to the market size of each bond type. Most U.S. traded investment grade bonds are represented. Municipal bonds and Treasury Inflation-Protected Securities are excluded, due to tax treatment issues. The index includes Treasury securities, Government agency bonds, Mortgage-backed bonds, corporate bonds, and a small amount of foreign bonds traded in U.S. The Barclays Capital Aggregate Bond Index is an intermediate term index.

3Rebalancing can entail transaction costs and tax consequences that should be considered when determining a rebalancing strategy.

Exhibit 1: The S&P 500 Index from December 31, 1999 through December 31, 20121

That retiree is now 88 years old.  Did the portfolio serve the retiree’s needs by allowing inflation-adjusted withdrawals to support the retiree’s lifestyle? Did the plan have to be changed? Does the portfolio still have enough to provide for the rest of the retiree’s life?

In hindsight, the retiree did just fine.  Yes, the portfolio served the retiree’s needs by allowing inflation-adjusted withdrawals to support the retiree’s lifestyle.  No, the plan did not have to be changed.  Yes, the portfolio still has enough to provide for the rest of the retiree’s life Plan to 95.

Calculating the portfolio balance each year by the inflation-adjusted withdrawals and rebalancing annually demonstrates that, while the retiree’s portfolio had its ups and downs, even with the historically poor stock market returns for a prolonged period, the portfolio never came close to running out of money (See Exhibit 2).

Exhibit 2*: Portfolio Balance of a Retiree Who Retired in December 1999 through August 2023

*For illustrative purposes only. There is no guarantee that similar results can be achieved. Future results may be more or less favorable than shown. Assumptions includes: Investment of $1,000,000 at age 65, 4% annual withdrawal rate, annual inflation adjusted based on Consumer Price Index, and a 60% stock/40% bond account rebalanced annually as noted earlier. 

Lessons and Requirements for Investing Success

The American economy is primarily free-market capitalism, which is a dynamic and adaptive system where the economic pie has grown over time. As a result, the historical evidence clearly and strongly suggests the American financial markets trend upward over time (See Exhibit 3).  Such long-term growth occurs despite bear markets, bubbles, recessions, inflation, stagflation, disinflation, deflation, pandemics, wars, terrorism, geo-political events, embargoes, trade wars, scandals, political parties, deficits, assassinations, and social upheaval, as noted in the below graph.

Exhibit 3*

The” S&P 500 Index” chart and the “Total Return Index of US Stocks” chart are broad indexes and are neither specific investments nor a group of investments and cannot be invested in directly.

We believe there are  several basic requirements necessary to help achieve long term investment success, among them:

  • A good long-term plan.
  • The discipline to stick with that long-term plan at all times.
  • Patience and a long-term perspective.
  • Faith in the American economy and financial markets.
  • Emotional control.

This list is simple but not necessarily easy.  Developing a sound long-term plan takes effort and most humans struggle with the other items because they go against the natural hard wiring in our brains. 

How to Implement the Lessons Learned

At MAI Capital Management, we abide by the idea that we are helping our clients plan long-term for their futures. We are here to educate people, discuss goals, and help implement practices to help them achieve them. When planning for retirement, we recognize that following a few simple rules, looking to the future, and making informed decisions rather than panic-driven decisions will help us help our clients.

If you are interested in learning more about how we can help you plan for retirement, please contact us at info@mai.capital.


If you have any questions related to this topic or your portfolio in general, please do not hesitate to reach out to your wealth advisor at any time. Please send your questions, comments, and feedback to: info@mai.capital. Any statement non-factual in nature constitutes only current opinion of this author which is subject to change without notice. Certain statements are of future expectations and other forward-looking statements are based on management’s current views and assumptions. Any statistics mentioned have been obtained from sources we believe to be reliable, but the accuracy and completeness of the information cannot be guaranteed. Neither the information nor any views expressed should be considered investment, legal or tax advice, or constitute as a recommendation to buy or sell any security, strategy, or product. It should not be assumed that this is a forecast of future events or that any security transactions, holding, or sector discussed where or will be profitable or that the investment recommendations or decisions we make in the future will be profitable. Past performance is not indicative of future results. Investing involves risks, including the loss of principal. Performance does not represent the results of actual trading but was achieved by means of retroactive application. Results may not reflect the impact that material economic and market factors might have had on the adviser’s decision-making if the adviser were actually managing client assets.

We look forward to learning about your financial goals.

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