As I write this column, the S&P 500 is again hitting an all-time high. This isn’t unusual, all-time highs are much more common than they feel. Citi reports that since 1960, the S&P makes, on average, a new high about once every 14 trading days. And though this represents tremendous ongoing progress, it leaves many near retirees with a nagging question: “What happens if I retire just before a bear market?”
Sometimes driven by fear, sometimes driven by pragmatism, this question continues to pop up in recent meetings with clients. After decades of saving and investing, retirement changes the way market declines feel. During the working years, a bear market is uncomfortable, but paychecks often continue. Because income is not dependent on the market, itap easy to close the account statement and revisit it when things get “better.” Wise investors may even relish the idea of a bear market. After all, lower prices help long-term investors buy more shares at temporarily low prices.
But in retirement, the same decline feels very different. The portfolio is no longer simply a future resource but a necessary part of the household paycheck.
To answer this question we have to consider a financial planning tool called sequence-of-risk-return or SORR for short. It sounds technical, but the idea is simple. Two retirees can experience the same average return over a long period and still have very different outcomes if one suffers poor returns early and the other suffers them later. A bad market in year 20 of retirement may be unpleasant, but a bad market in year one or two can be far more damaging because withdrawals are being taken while values are down.
That does not mean a person should fear retirement simply because markets are near all-time highs. Over long periods, markets reach new highs because businesses grow earnings, productivity improves, dividends increase, innovation continues and the economy expands. If markets never reached new highs, long-term investors would have a much larger problem.
Still, the phrase “all-time high” can feel ominous, as if we’ve reached the edge of something we’re about to fall over. While it may “feel” scary, history reminds us that bear markets are part of a balanced story. New highs do not prevent bear markets, but neither do they predict one. They are part of the normal experience of owning productive businesses over time. Temporary market pullbacks are part of the “cost” of investing.
But what if we ignore that markets are making all-time highs and simply return to the other half of the question, “If markets decline, where will my spending money come from?”
That is the heart of retirement planning. First, understand a key concept that Ray Dalio discussed during a recent interview – the difference between money and wealth. Put simply, wealth is the number on a statement. It may look reassuring, but wealth cannot be spent until it is converted to income. You can’t spend wealth at the grocery store, you can spend cash.
Sometimes that income comes from Social Security, pensions, interest, dividends, rental income or part-time work. Sometimes it comes from selling investments. Most retirement plans involve some combination of these. The important point is that retirement is not simply about preserving a large number on a statement. It is about arranging income resources so they can reliably support life.
That distinction becomes especially important during a bear market. If all spending must be funded by selling investments, a retiree may be forced to sell shares when prices are temporarily depressed. Those shares are then unavailable to participate in the eventual recovery. This is how a temporary decline becomes a permanent problem. The danger is not only that markets fall; the danger is needing to liquidate long-term assets at precisely the wrong time.
One of the simplest ways to reduce that risk is to keep a reserve of cash equal to a few years of anticipated spending needs. Its purpose is not to maximize return, but to create breathing room when needed the most. If a bear market arrives shortly after retirement, a cash reserve can allow a family to meet expenses without immediately selling long-term investments into weakness.
This reserve should not be confused with a permanent investment strategy. Holding too much cash for too long creates its own risk, especially in a retirement that may last 25-30+ years. Inflation is the perpetual headwind we all face and purchasing power of cash slowly degrades over the years.
In that sense, dividend income and cash reserves can work together. Cash provides immediate breathing room. Growing dividends provide an ongoing reminder that the portfolio is not merely a balance on a statement, but ownership in businesses capable of sending cash back to their owners. Neither tool eliminates sequence-of-returns risk, but both can reduce the pressure to turn temporary market declines into permanent mistakes.
A few years of cash will not make a retirement plan successful by itself. Nor will dividends, bonds, equities or any single tool. But properly arranged, these pieces can create something every retiree needs: the ability to fund life today while allowing long-term assets time to work for tomorrow.
Retirement has never been about spending a statement balance. It is about converting a lifetime of accumulated wealth into the income and flexibility needed to live well.
Steve Booren is the founder of Prosperion Financial Advisors in Greenwood Village. He is the author of “Blind Spots: The Mental Mistakes Investors Make” and “Intelligent Investing: Your Guide to a Growing Retirement Income” He was named by Forbes as a 2024 Best-in-State Wealth Advisor, and a Barron’s 2024 Top Advisor by State.
