How to Recover from a Market Crash if You're Retired

Terry Herr, CFP®, CLU

If you're retired, you may be feeling more concerned about market volatility than others. When an economic upset occurs, the question becomes: what should you be doing next? Below are four things you can do to help recover from a market crash. 

#1: Review Your Financial Plan

Many of us are emotional about our money, and we can’t help it.  Watching the market crash, or seeing our stocks drop overnight, can cause panic - and understandably so. The first thing to do when faced head-on with a market downturn is to pause, take a breath and review the financial plan you have set in place.  

Your plan is a necessary component in reaching your financial goals and ensuring you continue to reach them.  It was (or should have been) developed with an objective, logical approach to reaching and sustaining your financial goals. 

Herr Capital Management develops financial plans and  investment strategies that include preparation for the unexpected - whether it’s a market downturn, death in the family, loss of a job, etc. Reviewing your plan amidst a market crash can be a comforting first step in remembering not all is lost. Doing so can serve as a reminder that now is not the time to make hasty, emotionally-driven decisions. Rather, now is the time to focus on your personal economy and what you can do to rebuild or reallocate what you need throughout retirement.

#2: Decide Whether or Not to Continue Investing 

You’ll likely want to talk with us about whether or not continuing to invest in the market is in your retirement’s best interest. Pulling out now may be your first instinct, but we will likely advise against it. That’s because, depending on your circumstances, jumping ship too early could prevent you from recouping any losses, should the market change.

While history is no guarantee of future performance, historically bear markets do recover. If you have the flexibility (and years) to do so, you may be advised to ride the downward trend out in hopes that you can recoup your losses when the market eventually stabilizes and begins to add gains. This decision is one that should be made with a logical, disciplined approach, and in tandem with the rest of your retirement income strategy.  It could also be the critical decision that keeps your probability of success high.

#3: Rebalance And Reassess Your Risk

A market crash can serve as a true indication of your risk tolerance, meaning this could be an ideal opportunity to reassess your personal tolerance for risk. We all feel less risk tolerant during periods of decline, but  you may find that you are more risk tolerant than your thought.  

Look closely at your portfolio, specifically at the balance between stocks and bonds. At a time like this, it may be tempting to change your asset allocation in favor of more fixed income, which is generally considered a lower risk option.  However, in a rising interest rate environment, fixed income investments may actually increase your portfolio risks.  A more logical decision may be to increase your "perceived" risk by purchasing more equity investments. If equity values have dropped you may be buying them at a reduce price and at a lower risk premium.  You may also want to look at some other non-traditional investment options as alternatives to stocks and bonds.

Reassessing risk and rebalancing is a critical recurring step in a life-long investment process.  Depending on your resources and retirement income plan lowering risk may make sense for one person, while increasing risks may make sense for another. Market Crashes are the times when it becomes even more apparent that every retiree needs a well thought out and unique plan that fits them.  When it comes to retirement income planning, there is no one-size fits all approach.

#4: Adjust Your Budget 

You can’t control the market, but you can control other aspects of your financial life - including your spending and saving strategies.  You don’t want to pull from your investments and/or sell your assets if minor lifestyle changes will suffice.  Take a look at your weekly or monthly budget and see where adjustments can be made.  Whether that means eating out less or reducing the number of trips you budget for each year, evaluate ways in which you can reallocate “fun” money to cover necessities. And as you do, remember to include contributing to your savings account or emergency fund as a top priority. 

When a market crash occurs, it can feel like the future of your finances is out of your control. A well-thought-out plan that is implemented with unemotional discipline can provide you peace of mind and confidence in your ability to meet your long term needs.