The Next Bear Market: How Bad Could It Get?

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In November of 1972 the Dow Jones Industrial Average closed at a little above 1,000 points. Then it went down, and stayed mostly down, for the next ten years. While the Dow sat still, life went on….

Grizzly bear

The first U.S. space station and shuttle were launched. The Watergate scandal came and went. John Lennon was killed, and Elvis Presley died. Video players and personal computers were invented. Bill Gates founded Microsoft. And I made my way from junior high school to college graduation.

Finally, late in 1982, after 10 years, the Dow crossed the 1,000 point threshold again, on its way to new highs.

Retirement was different in the 1970’s. Pensions were the norm. But had you been living primarily off your investments, the decade would have seemed an eternity. And it would have devastated an unprepared portfolio.

If you are early in retirement, a lengthy bear market is your worst-case scenario. It exposes your assets to damage that can’t be recovered in your lifetime. It’s happened before, and it could happen again. How do you prepare?

Retirement Cash Flow

In other posts, I’ve discussed how to assess your retirement income and size up your retirement expenses. Those are essential personal factors to understand as you begin your retirement journey. They are comparable to choosing a vehicle and understanding its gas mileage.

But you also have to look out the window! You need to understand where you are, and what kind of terrain you’ll be driving through. You can’t use a single speed, gear, or direction for any real-world journey, and you can’t for the retirement journey either.

In most modern retirements, you’ll need to tap into an investment portfolio for at least some of your expenses. You’ll need those investments for expenses that are not covered by guaranteed income streams such as pensions, annuities, or Social Security. A few will get by on only those guaranteed income sources, but the rest of us, who manage investment portfolios in retirement, will face the question, “When do you sell assets?”

Study after study has shown that it is impossible to accurately predict or time the stock market. Nobody can outperform the market over the long term. Some people can do it some of the time. But nobody does it all the time. And the very few who are more successful at it than others (think Warren Buffett) are impossible to identify in advance!

My original research on the best retirement withdrawal strategies suggests there is value in trying to synchronize the sale of your asset classes with long-term market cycles: Sell stocks when stocks are up, sell bonds when stocks are down. The historical simulation I did demonstrates that such a strategy can pay off over time.

But it only works if you have enough of the necessary asset classes when they are in favor to sell. Otherwise, you’ll be selling damaged assets at a discount!

Economic Cycles

Economic cycles play out every decade or so, but their exact timing is unpredictable, and the variations from one to the next are significant. Certain metrics like Robert Shiller’s Cyclically Adjusted Price-to-Earnings ratio (CAPE) help us to understand roughly where we are now — which part of the economic cycle the market is currently in. And that tells us, roughly, how our assets are valued against each other.

We also have historical data telling us, on average, how long market or business cycles have lasted in the past. With this information, you can make informed guesses about how to structure and manage your retirement assets.

For our purposes, living off of assets in retirement, this is accurate enough. With few exceptions, the markets, and especially whole economies, do not change overnight. They gradually transition from one phase to the next.

In general, it simply isn’t necessary to make major financial decisions quickly. And even in those rare cases when markets are changing rapidly (usually falling), if you have a passive investment strategy with a diverse allocation, then you won’t have to react at all.

The one regular decision you cannot escape in retirement is this: Do I need cash? And, if so, where should it come from? Which investment assets should I tap now?

The best way to decide that is by understanding where you are in the current market cycle for the major asset classes. There is no perfect indicator, but my recent research points the way to maximizing retirement withdrawals. It discusses using the CAPE metric to possibly liquidate your assets at the best point in time.

Bear Market Data

But, how long do those market cycles run? Specifically, how long might you have to rely on your conservative cash and fixed income investments to outlast a bear market in retirement?

Fortunately, we have good historical data on the length of business cycles and market declines. The Schwab Center for Financial Research has compiled statistics on the time to recovery of a market decline for recent history. It shows that over the past 50 years the average time it took the S&P 500 Index to recover to prior highs was a little over 3 years.

But that’s an average. In retirement, when rebuilding assets by returning to work may be impossible, we are also concerned about the worst cases. How bad could a bear market get? Wade Pfau has studied worst-case market declines going back to the early 20th century. His data on real stock market losses larger than 50% shows the number of years it took for the real stock market value to again exceed the level prior to major market drops. Whether looking at the U.S. or a GDP-weighted “world” portfolio across 20 countries, that average worst-case recovery was about 9 years.

Finally, we have the National Bureau of Economic Research (NBER), the organization that officially delineates business cycles. The NBER measures the length of all U.S. business cycle expansions and contractions. On their web site, we can see a list of business cycles going back to the 1800’s. Though business cycles are not identical to market cycles, the statistics are strongly related. The stock market reflects the business cycle, often in advance. The NBER data shows the average time from peak to peak in 33 business cycles from 1854 to 2009 was 56.4 months, or a little less than 5 years.

Defensive Asset Allocation

These numbers neatly bracket the critical time spans for liquidating assets in retirement. If you want to reduce or eliminate the risk of being forced to sell stocks at a loss, then you need to allocate your conservative cash and bond investments accordingly. Specifically, you need to multiply the above time spans in years by your required annual retirement income, and stockpile that much in conservative assets.

Bottom line, to outlast a run-of-the-mill bear market, you should have three years of cash on hand. And for a worst-case recession/depression, you’d better have close to a decade worth of cash plus bonds you could liquidate once cash runs out. These are the assets most likely to hold their value during an extended downturn.

And these recommended allocations for cash and bonds are remarkably close to the allocations in my own portfolio. Which is a major reason why I’ve had no trouble sleeping through market volatility. Nobody knows what history-making events the next decade will bring. But, with the right asset allocation, you can be reasonably sure of arriving there with your retirement lifestyle intact!

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[The founder of, Darrow Kirkpatrick relied on a modest lifestyle, high savings rate, and simple passive index investing to retire at age 50 from a career as a civil and software engineer. He has been quoted or published in The Wall Street Journal, MarketWatch, Kiplinger, The Huffington Post, Consumer Reports, and Money Magazine among others. His books include Retiring Sooner: How to Accelerate Your Financial Independence and Can I Retire Yet? How to Make the Biggest Financial Decision of the Rest of Your Life.]

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  1. Another great article and very helpful, as I am recently retired and wondering about this very subject. Because my wife and I have some guaranteed income from pensions and Social Security, that will cover 70% of our expenses. So, I will take the remaining 30% of expenses, multiply it by 9 years (worst case) and use that as my conservative cash allocation bucket. And as I currently have about “double” that amount in safe money now, I feel I can reinvest some more safe-money into equity\assets. This article was very timely for our needs, so thanks again!

  2. Thank you for the article. Something I was wondering, given my circumstances are different in that by maximizing SS in a few years, that income stream would be adequate for normal expenses. So, the risk for stock performance less. Given that high stock gains often occur before market corrections, would it be better to sit tight and weather the oncoming storm? As you say impossible to time the market. Maybe a 30% gain before a 50% correction wouldn’t be as bad as an attempt to time the market. I know when living entirely off investments this would be too volatile.

    1. Agree with the idea of inability to time the market, so no insights there.

      With SS meeting your basic needs it serves the role of cash/bonds to allow you to ride out a bad bear market and puts you in a position of strength when making this decision. I think the key question is whether you would feel better if you got all of the market upside or worse if you suffered a substantial loss? There is an argument that once you’ve “won the game” you should take all risk off the table. A counterargument is that if you’ve already won the game, why not swing for the fences if that money could potentially be life-changing for future generations of your family, a cause you care greatly about, etc.

      Best wishes as you make your decisions,

  3. Thank you for another great article! You are one of the only FIRE bloggers that talks about having multiple years of cash in hand. Is that because you’re in your 50s vs the 30-40s bloggers? We are turning 50 and will be retiring in less than a year. We’re targeting a 70/30 stock/bond and cash allocation. This last year of working we’re building cash to cover 2-3 years of living expenses. However, we are going to be setting up a 72T Seep, which will cover 1/2 our annual living expenses so I’m thinking we could cut the cash in hand in half as the 72T can’t be changed. Thoughts? Also, currently the TSP funds we’d be drawing on for the 72T are probably around 60/40 currently and TSP doesn’t allow us to choose the funds we’d draw from. Not sure we can just roll the funds needed for the 72T into a different 401k to solve that problem. Any suggestions on appropriate allocation when we’ll be using this for about 10 years- should the portion of money needed for the 72T withdrawals go into a cash position?

    Thanks again for all your excellent content!

    1. I think more important than age is how we’re defining retirement. Many FIRE bloggers, myself included, reach the point of FI but realize a full retirement of no work and no income are not what we really desired. The risks of a bear market and thus the need to have as much cash are not as great if you have ongoing income streams that are likely to remain viable through a bear market. This is why I try to be as transparent about what we’re doing as possible and I recommend taking the time to make sure you understand if others are as well before following the path that they’re taking.

      Re: the TSP we are unable to give any specific investing or financial planning advice. It is generally advisable to pay a fee only advisor to help you work through any specific challenges you don’t feel comfortable handling on your own.


  4. Talk of guaranteed sources of income brings to mind the use of annuities to help address bear market income. I know that SPIAs have pretty pathetic payouts at current interest rates and potential inflation around the corner certainly gives one pause. Darrow has written in the past about his plans to use SPIAs in the future. I wonder what his thoughts are now re: the use of annuities to help ride the bear. Pfau (mentioned in this article) feels that annuities address fixed income allocations better than bonds. I would be interested to get Darrow’s thoughts on this.

    1. Other than SPIAs, most annuities are a bad proposition, with market caps, participant rates, high fees, etc. Very complex and fee-laden instruments. Most agents don’t even understand them. I wouldn’t even recommend a SPIA unless late in life and the situation calls for it and the math says it’s viable,

      1. The big challenge with a SPIA is that, to my knowledge, you can’t currently buy one that has an inflation adjustment. Thus if we get an inflation spike as many people are predicting you could be locking up your money in a product that could lose a lot of its purchasing power. I would agree with Bill that annuities are generally complex and you have to do your homework before committing a large sum of money to one.


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