How to retire when the stock market is plummeting

Retirement should feel liberating rather than terrifying. But when an egg-salad sandwich costs more than your first bicycle, the stock market is making like Tom Petty, and economists are bending themselves into pretzels to avoid saying the word “recession,” retirement can feel hazardous to your financial health.

In a perfect world, everyone would retire into a robust economy. But since we live in this world, there’s no way of knowing in advance if your timing is right.

Retiring during a downturn may not be ideal, but there are several ways to manage it. Here’s how you can survive and thrive if you retire when the market is tanking.

Know your retirement risks

There are two distinct risks facing you and your money if you retire during a down market.

The first is a timing risk. Market downturns typically coincide with economic downturns, which often leads to wide-scale job loss. Workers approaching retirement tend to be in their peak earning years, which can make them vulnerable to cost-cutting layoffs. Getting laid off just before retirement can be a bit of a one-two punch, since you may need to fund a longer retirement than you’d planned and your investments may have also taken a hit at the same time.

The second potential risk is the possibility of cashing out some of your retirement portfolio while the market is down. If you have to access some of your retirement funds before the market recovers, you make any portfolio losses permanent. That leaves you with less money to live on now and less money invested that can continue to grow.

Laugh in the face of risk

Involuntary retirement and loss of principal may be nothing for a pre-retiree to sneeze at, but you can protect yourself from the vagaries of the market and your employment. These four strategies can help anyone who is contemplating retirement in the next few years:

Keep a flexible retirement schedule

In the movies, any police officer or international art thief who is only one day or one job away from retirement usually doesn’t survive the final act. These poor sods teach us the folly of tempting fate by setting a specific retirement date in stone—not to mention the importance of hiding behind whichever coworker is the hero and who therefore has impenetrable plot armor.

Even if you’re not worried about getting clocked by a minor villain the day before you retire, your planned retirement date could run afoul of another danger: It has a decent chance of coinciding with a market correction. The stock market has a pattern of crashing approximately every seven to eight years, with periods in between of flat growth, minor but significant dips, and other market turbulence that has investors reaching for the Mylanta.

Rather than setting a date on your calendar and treating it as sacrosanct, make your retirement plans flexible. If the market is iffy, consider working longer to give your portfolio time to recover. That might mean pushing back your last day or finding part-time or consulting work so you can avoid dipping into your nest egg.

Rebalance early and often as you approach retirement

Of course, not everyone has the ability to work past their planned retirement date. If you’re laid off, forced to retire, or simply need to retire right now because someone is microwaving fish in the office kitchen on a daily basis, you may end up leaving work at a bad financial time. But the investment decisions you make in the years before you retire can help protect you and your money from bad timing.

Specifically, as you get closer to your planned retirement, you will want to regularly rebalance your portfolio to reduce your exposure to market risk. When you rebalance, you shift money from one type of asset to another to better meet your investment goals.

As you get closer to retirement, you may want to move money from some of your higher-risk/higher-return investments (such as stocks) into lower-risk assets (such as bonds) or even cash equivalents (such as Treasury bills). Pre-retirees may want to rebalance as often as every six months or so.

There are two benefits to regular rebalancing in the years before you retire. The first is that it allows you to lock in gains when the market is doing well. If you move money from stocks to bonds or T-bills when the stock market is going gangbusters, you get to capture those gains and put them safely into a lower-risk asset.

In addition, capturing your gains and putting them in cash equivalents means you will not need to pull from your ailing investments if you retire during a downturn. You can easily access the money set aside in the cash equivalents and give your long-term investments time to recover.

Make friends with your emergency fund

According to conventional financial advice, every single person should have an emergency fund filled with enough money to cover three to six months’ worth of living expenses. The thinking is that such a fund will ensure you can keep afloat if you lose your job—but almost nobody actually has that kind of money sitting in a savings account.

The five years before you retire are a great time to commit to building an emergency fund of that size. A three-to-six month financial cushion in an easily accessible account can help you bridge the gap between a badly timed retirement date and a market recovery. And even if the market is doing fine right when you retire, having that fund available can help you smooth over any financial difficulties you face during the transition.

Wait to take Social Security

It may sound counterintuitive, but one of the best things you can do if you retire into a market downturn is to hold off on taking your Social Security benefits. Even though Social Security is money that you can count on if the stock market is feeling funereal, most retirees are better off delaying benefits.

Here’s why: Your monthly benefits increase by approximately 8% per year that you delay benefits between age 62 and age 70. There is no investment that can offer a guaranteed 8% growth per year (plus cost of living adjustments) over an eight-year period.

And remember that your benefits are guaranteed for life. Waiting as long as you can to take benefits will give you a larger monthly income stream forever—or at least until the day you go to the big Social Security office in the sky.

Don’t panic

Involuntary retirement and locking in market losses are a retiree’s biggest risks, but you can mitigate both risks with some savvy planning.

Keep your retirement plans flexible so you can take the time to wait out a market correction. Commit to a regular rebalancing of your portfolio to help reduce your exposure to risk, and build up your emergency fund so you can avoid dipping into your portfolio at the wrong time. Delay your Social Security benefits to get a higher benefit that lasts the rest of your life.

Retiring during a market downturn is bad luck—but it doesn’t have to be a personal financial crisis.