As the US stock “bull market” enters its tenth year since beginning in 2009 (meaning ten years of increasing stock prices), articles about “the coming bear market” (a stock market drop of 20% or more) have been appearing in the financial press with some frequency. For retirees and people considering retiring in the next few years, the prospect of a 20% or greater drop in stock prices is alarming and certainly worth consideration and preparation. So, let’s look at the most recent prior bull and bear markets starting with the numbers and then, how you might prepare for the next Dow Bear.
The Dow Jones Industrial Average, a benchmark of stock of the 30 largest US companies, is often used as a measure of bulls and bears. On July 17, 2007, the Dow reached a then all-time high of 14,000. The Dow Bear that followed is sometimes called the Great Recession, because it was the most serious bear market in the lifetime of most investors. Stock prices began dropping in July 2007 and the Dow reached its lowest point, 6,443 on Friday, March 6, 2009.
The best way to have prepared for the 2009 Dow Bear would have been to consult your crystal ball and sell all your stock on the July 17, 2007 Dow peak of 14,000. You’d also have to start buying stock when on March 6, 2009 the Dow Bear reached its bottom of 6,443. The Dow began rising after March 9, 2009, reached its prior high of 14,000 in February 2013 and continued marching higher to its current roughly 26,000 level. If only predicting the peaks and valleys of the Dow was that easy! If you’re confident you can predict the future, you’re prepared for the Dow Bear and you can stop reading now.
If you’re still reading, you know better than to think that you’ll be able to predict the future accurately during each of your many years of investing and retirement. Those of us who do not own a working crystal ball need another approach. One other way to prepare is to ensure that you can avoid selling stock during a bear market.
But how can you avoid selling stock when you might need it to cover expenses? And, how can you avoid selling stock when stock prices are dropping dramatically and you have white knuckle level fear that your savings might be wiped out entirely? Here are steps you can take to prepare for and survive the next Dow Bear.
Step #1: Estimate the amount you need from your investments for as many years as you can imagine necessary for the Dow Bear to recover and become the Dow Bull.
After the Great Recession, it took four years, until 2013, for the Dow to reach its earlier peak of 14,000. That four year recovery period is the longest time from Dow Bear to Dow Bull in the lifetime of most people reading this article. If you want to be more conservative, use five years or longer. Estimate how much you need to withdraw from your investments for living expenses plus a cushion for 4-5 years or longer. Why a cushion? For unexpected expenses and a comfort level to deal with the fear that the Dow Bear causes.
For example, if a couple’s living expenses are $75,000 annually and their total social security benefits are $30,000 then they need to withdraw $45,000 each year from their investments. For a five year period that is $225,000.
Step #2: Determine how you could cover the 4-5 years of expenses you’ve estimated in Step #1 without selling stock.
Possible sources to cover living expenses without selling stock include: income from employment, cash, selling non-stock investments such as bonds or real estate and borrowing from a line of credit. There are pros and cons in relying on each of these sources, depending on your circumstances. For example, using borrowed funds from a line of credit is not generally considered an acceptable way to invest. Real estate as a source of living expenses would work if the real estate produces sufficient and consistent rental income. Cash and bonds are better choices.
Here is one example: Jack and Jill would like to be able to spend $75,000 annually after taxes and are retired. Their total social security benefit after taxes is $30,000 and they have $750,000 in retirement savings mostly in tax deferred IRA accounts and a checking/savings account of $25,000. They are conservative and prefer to have 7.5 years of annual expenses in non-stock investments. That being said, Jack and Jill might choose to keep $300,000 of their $750,000 in bonds and the rest in stock, a ratio of 40% bonds and 60% stock.
Preparing for a Dow Bear, especially after a decade of a Dow Bull, is worth consideration. As always, consult your trusted financial, tax and legal advisors when considering issues important to your financial future.
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