What Happens if You Retire When the Markets Are Down?

Simon Barcelon


22 Aug 2022


With decades-high inflation, 2022 has been quite a challenging year for investors. But if you’re in or nearing retirement, a market decline can become even more significant as you try to navigate life while withdrawing income from your portfolio. But with the right financial planning, these challenges can be mitigated. So, let’s take a look at how bear markets like the current one can affect your retirement plan and the strategies you can use to live the post-work life of your choosing confidently.

Market correction path this yearFor illustrative purposes only.

You’ve heard it all before. Whenever the stock market goes up significantly for any period of time, someone will always start shouting about our impending doom…the dreaded market correction. But just like market volatility, market corrections are not uncommon. In fact, there have been almost 40 corrections in the S&P 500 since the 1950s.* While market corrections may not mean much for working investors with a longer time horizon, it does present a unique challenge to your retirement portfolio – a challenge exacerbated when retiring in down markets, as you’ll soon see.

Retiring during a market downturn

Retiring during a correction or bear market presents the sequence of returns risk (sometimes called sequence risk): the risk that you can experience negative portfolio returns as stock prices later in your career or early in your retirement. With little time to make up for the market loss, this can significantly impact your retirement plan – even more so for retirees drawing an income from their portfolio.

The chart below shows the negative effects of withdrawing income during a bear market vs a bull market. The starting balance, withdrawals, and average annual return are the same in both cases. However, the outcomes are strikingly different because of the sequence of market returns.

Bear vs bull marketsFor illustrative purposes only.

As you can see, the ending portfolio value of the investor who retired during the bull market is $34,735 (55%) more than the investor who retired during the bear market!

So far this year, the traditional 60/40 portfolio is down approximately -11.11%. While the negative returns have not been pleasant for any investor, it’s much more problematic if you’re nearing retirement or newly retired – your portfolio may never recover.

Strategies to mitigate sequence risk

A few strategies to help mitigate sequence risk include increasing your liquid assets, tightening your discretionary budget, or incrementally decreasing the planned withdrawal amounts from your portfolio. Sure, these strategies can be effective, but they can take a lot of enjoyment out of your plans for how to spend your post-work life.

There is some good news, though. You can also limit sequence risk by using a solution tailored to retirees that provides lifetime income streams. The Longevity Pension Fund is the only mutual fund that strengthens market returns with longevity credits from other investors leaving the fund, helping to alleviate sequence risk.

Returns during a market downturn

Longevity employs several strategies to help reduce market volatility and protect against market corrections and inflation, including a hedging strategy that cushions and a sleeve designed to rise in inflationary environments. This sleeve includes a gold bullion fund and exposure to real assets – assets with inherent worth like real estate, energy, and infrastructure – all of which performed better than most bond and equity indices. These strategies have allowed the Longevity Pension Fund to return -5.24% year-to-date, muting the more significant selloff in equity and bond indices.

Despite the market correction and high inflation, all of the Longevity cohorts remain overfunded. This, along with conservatism intentionally built into the fund’s Income Policy to help combat volatility, has enabled us to hold distribution payments constant in this market and give confidence that distribution rates will remain steady going forward, which is the most important thing for retirees that are depending on this level income to meet their non-discretionary income needs (housing, food, medical expenses).

The bottom line

Longevity is meant to comprise a portion of your retirement portfolio to provide additional lifetime income above what the government provides to meet your non-discretionary income needs. The balance of a traditional portfolio can be used to cover discretionary expenses and can be scaled up or down with market performance.

Speak with your financial advisor to see how Longevity can fit into your portfolio or contact us if you’d like to speak with our retirement income specialist.

*”How Long Do stock Market Corrections Last,” The Motley Fool: https://www.fool.com/investing/2022/03/20/how-long-do-stock-market-corrections-last

All performance numbers are as of July 31, 2022. The traditional portfolio in the example above is made up of 60% S&P500 and 40% Canadian Universe Bonds.

Commissions, trailing commissions, management fees and expenses all may be associated with investment fund investments. The prospectus contains important detailed information about the investment fund. Please read the prospectus before investing. There is no assurance that any fund will achieve its investment objective, and its net asset value, yield, and investment return will fluctuate from time to time with market conditions. If the securities are purchased or sold on a stock exchange, you may pay more or receive less than the current net asset value. Investment funds are not guaranteed, their values change frequently and past performance may not be repeated.  The Fund has a unique mutual fund structure. Most mutual funds redeem at their associated Net Asset Value (NAV). In contrast, redemptions in the decumulation class of the Fund (whether voluntary or at death) will occur at the lesser of NAV or original purchase price less distributions paid.

The Longevity Pension Fund is managed by Purpose Investments Inc. The document is not investment advice, nor is it tailored to the needs or circumstances of any investor. Talk to your investment advisor to determine if the Longevity Pension Fund is right for you and always read the prospectus before investing. Nothing on this document shall be considered a solicitation to buy or an offer to sell, or a recommendation for, a security, or any other product or service, to any person in any jurisdiction where such solicitation, offer, recommendation, purchase or sale would be unlawful under the laws of that jurisdiction. No securities commission or similar regulatory authority has reviewed this document and any representation to the contrary is an offence. Information contained in this document is believed to be accurate and reliable, however, we cannot guarantee that it is complete or current at all times. The information provided is subject to change without notice.

Certain statements in this document are forward-looking. Forward-looking statements (“FLS”) are statements that are predictive in nature, depend on or refer to future events or conditions, or that include words such as “may,” “will,” “should,” “could,” “expect,” “anticipate,” intend,” “plan,” “believe,” “estimate” or other similar expressions. Statements that look forward in time or include anything other than historical information are subject to risks and uncertainties, and actual results, actions or events could differ materially from those set forth in the FLS. FLS are not guarantees of future performance and are by their nature based on numerous assumptions. Although the FLS contained in this document are based upon what Purpose Investments believe to be reasonable assumptions, Purpose Investments cannot assure that actual results will be consistent with these FLS. The reader is cautioned to consider the FLS carefully and not to place undue reliance on the FLS. Unless required by applicable law, it is not undertaken, and specifically disclaimed, that there is any intention or obligation to update or revise FLS, whether as a result of new information, future events or otherwise.