Facing The Bear? Don’t Play Dead!

The retirement moves that turn a market mauling into a comeback story…

We asked in newsletter [#017] “Will the Bull or Bear Control YOUR 5-Year Retirement Window?”

The answer, of course, is “Nobody Knows!”

And if someone says they DO know, run the other way! We call this “Sequence of Returns” risk, TOTALLY UNPREDICTABLE…that can ruin your retirement.

Unfortunately, most seem to bury their head in the sand and hope for the best.

Many of you have heard the reasoning, “Just don’t take out more than 6% (or 3% some say), and your account should last forever, since the market has averaged 8%!”

We debunked that theory in newsletter [#017], when we showed that Steve ran out of money. Average rate of return (Return on Investment — ROI) ceases to matter much when you’re living on the money!

Your ROI in retirement MUST become…”Reliability of Income.’

We, on the other hand, believe that you PLAN for the worst, and then HOPE for the best!

What could be the worst? Let’s look at the history of US equities: bear market recovery times 1900–2025:

https://monevator.com/bear-market-recovery/

The retiree’s problem with all of this…

Every statistic above about ‘recovery” describes an accumulator — someone with new money and a long runway.

If that’s you, the prescription is almost boring: keep buying, especially when it hurts.

But if you’re retired or within five years of it, you’ve probably noticed the flaw.

You don’t have decades of paychecks ahead. You may have the opposite: a portfolio that has to produce a paycheck, every month, in any market. And that changes the math in one brutal way.

When you’re withdrawing, a bear market early in retirement does damage that the averages hide.

Selling shares at depressed prices to fund living expenses means those shares aren’t there for the recovery — the recovery the historical record all but promises.

Two retirees can earn identical average returns over 25 years and end up in wildly different places.

It all depends on when the bad years occur. As Newsletter [#017] showed, Mike not only survived but thrived, while Steve went broke despite having the same savings and spending needs.

We call this sequence-of-returns risk. It is the actual mechanism by which bear markets ruin retirements — not the drawdown, but the forced selling into it.

The good news: forced selling is a plumbing problem, and plumbing problems have plumbing solutions. Better still, nearly every one of those solutions works best during a bear market.

Falling prices don’t just create opportunity for buyers — they create opportunity for planners.

Move 1: Reduce your supplemental income needs BEFORE retirement.

The simplest defense against selling stocks low is not needing to.

You may say, “But, Nora, I have bills, and I don’t have a lot of savings outside of my retirement account!”

That’s often the case, but WHY?

We’ve been “sold” the idea that the best (almost only) place to save is our pre-tax retirement account, because it:

• Saves taxes now (Only to pay more later as it grows!)
• Grows more in the market (Maybe!)
• Our taxes will be lower when we retire (Not usually!)
• And I believe people just like to “count their pile of money” (So to speak!)

How often I see couples with significant income have credit card debt, car loans, etc., and NO SAVINGS outside of a million-dollar-plus retirement account!

When I advise them to STOP contributing beyond their employer’s “match” during that last couple of years before retirement, they balk!

Pay off the car, pay off the credit cards, put savings in the bank? Seems like a foreign idea to many!

Without credit cards to pay or car loans to pay, your monthly income needs are significantly reduced in retirement.

This reduces your need for larger withdrawals

“Okay, I’ve lowered my supplemental income needs, but I still need a supplement.”

Let’s set you up for one to three years of supplemental income withdrawals available outside of your invested retirement account. This lets your equities do what the table above shows it has always eventually done: RECOVER!

Move 2: Spend from the “Safe Pocket”, not the wounded one!

“Safe” is relative…

There’s no way to guarantee anything is totally “safe”.

We can, however, reduce the risk of withdrawing money when the market is down by establishing “non-invested” or “low-risk” investment retirement accounts.

Planning in advance is absolutely required.

A large IRA can be separated into multiple IRA accounts, or “buckets”.

A good plan is going to have at least 3 “buckets” for “pipelines” of income:

• Withdrawal bucket (non-invested or low-risk investments)
• Growth bucket (Usually stock market investments)
• Future Income bucket (Can be set up as “guaranteed income”)

These “pipelines” can solve our plumbing problem!

We’ll go into where you can put a “non-invested” or “low-risk investment” in a future newsletter. We recommend that you have at least 2–3 years of projected income needs in that “pipeline”.

The important factor is to have a place to make automatic withdrawals that is not subject to dramatic market swings.

The “Future Income Bucket” ensures that even if the market hasn’t come back, you have a guaranteed income you know will be there in the future. (More discussion in a future newsletter!)

Move 3: If you own a home, secure a HELOC (Even if you have a mortgage!)

What’s a HELOC? Home Equity Line of Credit!

https://www.agavehomeloans.com/learn/home-equity/heloc-vs-home-equity-loan/

When we mention this to clients, they often say, “I already have a mortgage. I’m trying to pay it off. I don’t want another one!”

A HELOC is different from a standard mortgage.

With a standard mortgage, you borrow a certain amount and pay it back according to a schedule.

Your mortgage has an “amortization schedule”. This schedule shows the principal and interest for each payment for the next 30 years, 20 years, or the length of your mortgage. That schedule doesn’t change, even if you add extra to your mortgage!

When you secure a HELOC, you’re not borrowing anything — unless you use it!

It’s simply a “line of credit” (similar to a credit card) backed by your home if you were to default, which you don’t plan to do!

We always recommend securing a HELOC before you retire, because it’s much easier to qualify.

And the good news? You can get one for 10, 15, or sometimes 20 years, and for a large amount, depending on your equity.

We recommend the largest line for the longest time; that way it’s “in your back pocket” for any emergency. (Think relocation, passing of a spouse…(

If you don’t withdraw any money, you pay nothing. It might cost you to set it up, perhaps an appraisal on your home, but that’s it.

Most importantly, there is NO AMORTIZATION schedule. You’re only required to pay the interest on the outstanding balance each month.

Example: You take out $40,000 for remodeling your home. If the interest rate is 6%, then $40,000 @ 6% for the year is $2,400/yr. / 12 equals a $200 payment due in the first month.

But you have an extra $1,000 of income each month, so you pay $1,000 that month. The extra $800 reduces the principal. The next month, the interest is calculated on the remaining balance, $39,200, $196.00 interest, while the $804 reduces the principal.

Many of my clients say, “Why would I do that? Why not just take it out of my IRA?”

Good question. If the market is down, do you really want to sell shares and miss out on the recovery?

AND the HELOC is a tax-planning tool! There are no taxes on the money you take out, because it’s considered “a loan”.

If the HELOC interest is 6%, and your tax rate is 20% when you withdraw from your IRA, which is the most cost-effective?

Also, you can pay back your HELOC, but you can’t put money back into your IRA, so you’ve lost all the future growth!

Also, could such a large withdrawal put you into a higher tax bracket?

Perhaps you withdraw ½ the money you need from your IRA to pay back the HELOC this year, and the other ½ next year, to keep the taxes down, or stay under IRMAA (the Medicare premium surcharge if you’re $1 over their cutoff for income!)

The HELOC many of our clients swore they’d never need became their “saving grace” when something unexpected occurred!

Again, we’ll dig deeper into this strategy in another newsletter. Of course, our membership site “Retire Plugged In” can help you understand all of these strategies in greater depth. It should be ready by September.

Click here to be notified when it’s available…

Move 4: Convert while it’s cheap. (Make a profit from a Bear Market!)

A Roth conversion is the rare strategy that gets mathematically better when your portfolio gets worse.

Convert traditional IRA assets while share prices are depressed:

• Pay income tax on the discounted value —
• The entire recovery compounds inside the tax-free wrapper
• Eliminates some future RMDs
• Prevents income tax under the 10-year inherited-IRA rule for your heirs

A $500,000 IRA that falls to $375,000 in a bear market can be converted for roughly 25% less tax than it could the year before.

The window matters for another reason right now:

The SECURE Act’s 10-year rule is fully in force, making a traditional IRA one of the most tax-hostile assets you can leave a high-earning adult child.

Bear-market conversions are how you fix that on sale!

Two cautions:

Caution 1: Watch the tripwires:

• Conversion income can trigger Medicare IRMAA surcharges two years later
• Can affect the new senior deduction —
• This is bracket-by-bracket work, not a lump decision.

Caution 2: The BIG Caution:

This move is only for those who have non-IRA money that can be used for taxes on the conversion. (Or an adult child willing to pay for it!)

I’m sure you’ve heard of people just paying the taxes out of their IRA…

Bad idea! Why?

• Reduces your IRA value that can grow
• You’re using depressed share values; you’re paying MORE for the taxes!
• It’s not worth it — takes too much time to replace the value you lost!

https://www.financialfieldnotes.com/financial-field-notes/i3qywsibk67ktj1rd1kg55g7f6nfvj

The point:

The historical record says Bear Markets have been temporary, every time, for over half a century.

But “the market recovered” is cold comfort to the retiree who had to sell at the bottom to pay for groceries.

The difference between the retirements that bears ruin and the ones they merely interrupt isn’t luck, and it isn’t market timing —

It’s whether the plan was built before the growling started.

Don’t play dead. Don’t panic either.

Plan!

If you want unbiased retirement information that answers your questions when you ask, and anticipates what you NEED to ask..(because you don’t know what you don’t know), get notified when our membership site “Retire Plugged In” goes live by clicking here:

Next week:

“Retirement Planning Now Starts in the Delivery Room”

Trump Accounts & Estate Planning

Okay, I’ll leave you with that for now. Have a great rest of your day, and I look forward to seeing you next week.

Take care,

Nora