How a Bear Market Affects Your Retirement Planning

Quick Answer

A bear market—an extended period of falling stock prices—can lower the value of your retirement savings. That said, careful planning can offset the impact of bear markets, even if you're close to retiring.

A man wearing glasses leans on his hand while looking at a stock chart on a computer.

A bear market—a sustained period of falling prices in stock and securities markets—has clear potential to impact retirement investments. But before changing your investment strategy in the face of one, you should weigh several factors, including how close you are to your planned retirement date.

What Is a Bear Market?

A bear market is a period when stock prices slide, growth prospects for stocks (and the companies behind them) are gloomy, and investors may seek alternatives. It is the opposite of a bull market, which is when stock prices are on the rise.

Despite its wide usage in economic and investing circles, the occurrence of a bear market is not something that's determined by a single entity. Generally, however, a bear market is defined as one in which a major market index, such as the S&P 500, declines more than 20% for a period of two months or longer. Indexes like the S&P 500 aggregate the prices of leading corporate stocks and are used to measure the market's general well-being.

In June 2022, following months of stock market volatility fueled by the start of war in Ukraine, lingering consequences of the COVID-19 pandemic and the Federal Reserve's decision to raise interest rates to stem inflation, the S&P 500 saw two straight months of decline. That marked the second bear market in as many years: In March 2020, COVID-related economic slowdowns sparked the first bear market in 11 years.

The S&P 500 has since rebounded from this year's slump, and the most recent bear market has already ended by some measures. Some analysts predict a better outlook for the remainder of the year, but the cyclical nature of markets makes future bear markets inevitable.

How Does a Bear Market Affect Retirement Accounts?

To the extent your portfolio consists of stocks (and securities underpinned by stocks, such as mutual funds and exchange-traded funds), a bear market will tend to reduce the value of your retirement holdings.

While this can be unsettling—no one wants to see their nest egg shrink—it's important to keep several things in mind:

  • Market fluctuation is normal. In historic terms, the sustained growth streak from 2009 to 2020 was the exception, not the rule; endless investment growth isn't something to take for granted.
  • Pricing downturns create buying opportunities. If you're still actively building your portfolio, price drops amid a bear market mean each of your contributions to your retirement plan can buy more shares than they could when prices were higher. This is one of the benefits of the dollar-cost averaging strategy applied by many retirement fund managers.
  • Panic selling can lock in losses. Unless an emergency requires you to liquidate your holdings, dumping stocks amid a price drop is generally ill-advised. It flies in the face of the "buy low, sell high" goal of maximizing return on investment and can solidify "paper losses" that could otherwise resolve over time.

Strategies for cushioning your portfolio from the impact of a bear market include:

  • Owning mutual funds designed for resilience amid market downturns: The logic behind mutual funds is that owning shares in multiple companies can shield you from the potential disaster of owning a single stock that goes south. Some mutual funds also balance shares of companies from different industries, some of which will thrive under circumstances that are less than favorable to the others. This can insulate the fund from deep losses under a variety of market conditions.
  • Balancing your portfolio: Bonds typically become more attractive to investors (and therefore more valuable) when stocks are in a downward trend, so having a mix of stocks and bonds (or bond funds) in your portfolio can help you weather bumpy markets.

Should You Delay Retirement in a Bear Market?

When it comes to retirement savings, there's never a great time for a bear market, but arguably the worst time for one is when you're just about to retire. Having your portfolio value drop just when you're planning to rely on it for supplementary income can be discouraging.

While one response might be to think about delaying retirement—an option that could also leave you with a larger Social Security benefit and give you more time to sock away savings—it may not be necessary if you've followed a typical lifetime-investment strategy.

Many professional fund managers, investment counselors and even automated robo-advisors typically follow the same basic arc when plotting investments against a client's career trajectory―making allowances for each individual client's risk tolerance and investment goals:

  1. Early in the client's career, seek relatively aggressive investment vehicles to grow the portfolio relatively quickly.
  2. As the client's earnings and savings increase, extend and diversify the portfolio to insulate against downturns in specific industries or markets.
  3. As the client approaches retirement, shift funds toward more conservative investments—with less growth potential but greater resistance to market volatility and, often, returns in the form of interest or dividends that can serve as retirement income.

If you've followed a plan such as this and you're close to retirement age, there's a good chance your portfolio contains a healthy mix of investment types. In the event of a bear market, this gives you the option to draw income from bonds or other non-stock holdings and give stock prices a chance to recover before you need to sell them.

If your planned retirement is still one or more decades in your future and you want to ensure your investment follows a career-lifetime strategy, discuss your goals with your fund administrator or a trusted financial advisor. If you have any other questions about the mix of investments in your retirement savings plan, or are considering rebalancing your portfolio in light of recent market events, it's likewise advisable to consult a financial professional before making any sudden changes.

The Bottom Line

While nothing can guarantee absolute protection from market shifts, careful planning and prudent asset allocation can help your hard-earned retirement savings ride out bear markets so it will be there when you need it in the years ahead.