Including returns from dividends, the S&P 500 is down 18.11% in 2022. If you are retired or will be retired soon, is this development cause for concern?
If you can implement strategies that will prevent you from experiencing a life-altering loss and maintain a positive outlook based on past experiences, there may be no reason to worry.
Equity markets are earning positive returns most of the time
Figure 1 in the chart below shows annual returns for the S&P 500 since 1926, including returns from dividends. This chart shows the following conclusions: Most of the time, but not always, you can make more money by continuing to invest in the stock market.
The numbers confirm the stock market’s “double-double” advantage.
- There are far more years of positive returns than negative returns, with scores ranging from 71 to 26 years.
- The arithmetic mean profit in positive years is much larger than the mean loss in negative years. The score is a positive average return of 21.3% compared to a negative average loss of 13.4%.
The chart also shows that if you decide to invest in the stock market when you retire, you should be prepared for several years of negative returns. But historically, if you’ve been patient and invested, eventually the market has recovered and you’ve paid off. This was often very large.
The key is to have a strategy that allows you to continue investing during a downturn. This is explained next.
Develop a strategy to keep investing even when the market crashes
Most people, professionals and amateurs alike, don’t have a reliable crystal ball to warn them when the stock market is going down or warn them when the market is about to rise. Once that realization takes hold, we recommend investing in the stock market for more returns in the long run. When I have a strategy for getting through the recession.
Here are two strategies to help pre-retirement and retirees weather the recession, backed up by research I did at the Stanford Center for Longevity Studies.
- Having enough retirement income to survive a stock market crash. How much is “enough”? An amount that prevents you from panicking or selling your investments when the stock market falls. One possibility is to have a guaranteed source of retirement income that covers most, if not all, of your “necessary” living expenses. Includes annuities, income annuities, interest income from bonds, cash flows from bond ladders, and withdrawals from reverse mortgages.
- For regular and systematic withdrawals from your invested assets, be prepared to reduce your withdrawals when the market goes down. This helps minimize long-term losses from a series of return risks. This risk is the risk of drawing out more during a recession because you don’t have enough assets to recover when the market rises again.
One good way to implement this second strategy is to apply a percentage to the value of your remaining assets at the beginning of each year to determine your annual withdrawal amount. The IRS’ bare-bones distribution is one example of a method that research has shown has worked well for this purpose in the past.
Consider your current investment climate as a test of your retirement investment strategy. If you’ve been very worried during the recent stock market downturn, I suggest you reconsider and possibly change your strategy.
If you’re not nervous, congratulations! But don’t get too complacent. No matter what happens in the stock market, you should continue to monitor your investments and retirement income sources to make sure you have enough income to live the life you want in retirement. Very good use of time.