Why It’s Better To Retire In A Bear Market Than In A Bull Market

If you're thinking about retiring, it's better to retire in a bear market than in a bull market. I've been “fake retired” since 2012 and I want to explain why this is so.

I put fake retired in quotes because these posts don't write themselves. My podcasts don't record themselves either. I also did some fintech consulting work for several years since I left my day job in finance.

Living a comfortable retirement life is all about managing expectations. You generally don't need as much as you think to be happy because the freedom you gain more than makes up for lost income.

However, if you retire at the top of a bull market, and don't change your risk profile, you might get screwed. The day you retire will be about as good as it gets.

If you retire at the bottom of a bear market, even if you change your risk profile to be conservative, your financial days will likely only get better. A recovery makes retirement living so much easier.

No matter how good we get at forecasting the future, we tend to extrapolate too positively for too long when times are good. While those who retire in a bear market will likely forecast lower returns than reality.

Better To Retire In A Bear Market

Here's why it's better to retire in a bear market. Although 2022 was a terrible year for risk assets, it was a wonderful case study in retiring in a bear market.

Let's say you retired with $3 million in after-tax investments in 2010, near the bottom of a bear market. You're a real millionaire. $3 million excludes the equity in your primary residence. However, you had closer to $3.8 million before the financial crisis hit. But you've decided you have enough to be happy.

Your $3 million is spitting out a comfortable $120,000 in gross passive income each year. 50% of your $3 million is in real estate while the other 50% is in a 50/50 stock and bond portfolio.

After tax, your $120,000 turns into $100,000 and you only spend $70,000 because you're not 100% sure you'll be able to stay retired. Besides, when you have no mortgage and no kids to support, $70,000 a year is more than enough, even in a high cost of living city.

Slow Recovery, Steady Portfolio Rebound

Instead of earning a 10%+ return a year as the S&P has done since 2010, you have only been able to earn a 6% return given your more conservative stock portfolio and lower leverage in your real estate portfolio.

After 6 years at a 6% compound rate of return with $30,000 a year in savings, your $3 million portfolio grows to $4,800,000. Applying the same 4% withdrawal rate, you're now able to comfortably earn or withdraw $192,000 a year in gross passive income.

After tax, the $192,000 turns into about $155,000, which means if you stick with your $70,000 a year budget, you can now save $85,000 a year instead of just $30,000.

Clearly, it's time for you to get more conservative with your investments because your after-tax passive income is 2X your budget. Meanwhile, your net worth is almost 70X your annual after-tax expenses.

Retiring During A Raging Bull Market

Let's say you've decided to retire with $3 million after 10 years of up, up, up in the S&P 500 and real estate market where you own a couple rental properties. 70% of your $3 million is in a 60/40 stock/bond portfolio.

Your portfolio also spits out a comfortable $120,000 a year in gross passive income or $100,000 net passive income. You forecast you'll earn at least $120,000 a year in gross passive income for the next 10 years because you believe your investments will grow by at least 3%, the current risk-free rate of return.

It's important for you to continue earning $120,000 gross/$100,000 net in order to maintain your retirement lifestyle and pay for your 8th grader's college tuition.

Your expenses are a little higher than the previous example at $90,000 a year versus $70,000 a year as a result. But at least you still have a $10,000 a year cash flow buffer, which equals 11.1% of your annual after-tax spend.

Then The Correction Comes

Let's say within six months after you retire, the S&P 500 corrects by 10%. The only way you could have earned 3% is if you invested 100% of your $3 million in to 10-year treasury bonds. But you didn't with a 60/40 equity/fixed income portfolio.

Meanwhile, a tenant vacates and one of your rentals is left empty for four months before you can find a tenant for 10% less than the previous rent. Your after-tax investments are now worth about $2.7 million.

At a 4% withdrawal rate, your $2.7 million portfolio can only produce about $108,000 in gross passive income, or about $88,000 a year after tax. No longer do you have a $10,000 a year cash flow buffer, you've now got a $2,000 annual deficit.

But 10% is only considered a correction, not a bear market, so let's keep going. After tightening up spending to $78,000 from $90,000 since you always want to save $10,000 a year, the S&P 500 and real estate market keep correcting by another 10%. Down 20% is officially the start of a bear market. Your $2.7 million now shrinks to $2.43 million.

The Downward Spiral Continues In A Bear Market

At a 4% withdrawal rate, your $2.43 million portfolio can only produce $97,200 a year in gross passive income, or about $80,000 after tax. Now your lifestyle is really getting crunched. You start to wonder whether the declines will ever end.

Retiring near the top of a bull market is one of the worst times to retire. After you retire, you face nothing but downside risk for 13-15 months, the average length of a bear market.

Average monthly supply of US housing chart

But of course, a 20% decline in the stock market and real estate market isn't uncommon. For good measure, let's model in another 10% decline. Now your $2.43 million portfolio shrinks to $2.18 million, meaning it can only generate about $87,000 gross or $71,000 in net passive income.

With a $70,000 a year college bill (tuition, room, board, transportation, books) just a year away, there is really no choice but to go back to work, do part-time work, or draw down principle. No matter how frugal you get, it's not enough.

One of the main reasons why so many people have a difficult time retiring is due to fear. Fear is one of the main ingredients necessary for achieving financial independence. But if there is too much fear, then the one more year syndrome shows up over and over again.

Retiring During Times Of Uncertainty

When I left work in early 2012, the S&P 500 had recovered about 70% of its losses from the financial crisis. The real estate market was still in the dumps, so I still had concerns we'd relapse into a recession.

We were neither in a bull market or a bear market. We had recovered from the 2009 lows, but there still wasn't strong conviction about the market or the economy yet.

Instead of going naked long, I used 100% of my severance check to buy a DJIA structured note that provided principal protection in exchange for only receiving a 0.5% annual dividend yield. The note offered 100% upside participation of the DJIA over the next six years.

S&P 500 historical performance chart - retired at the bottom of the bear market in 2012 and have seen big stock gains

Not only did the S&P 500 do well since 2012, the San Francisco real estate market also began to recover as well. In fact, both stocks and real estate reached record highs in 2021.

Median San Francisco home price appreciation - retire in a bear market is better as real estate prices have more upside

Only a fool would be unable to stay comfortably retired if they left work in 2012. Luckily I ain't no fool. But I did get very lucky as real estate and stocks have done extraordinarily well since.

Conservative Investor In Retirement

If you read the FS archives, you'll know I've been relatively conservative with my public investment portfolio since 2012. I believe this is the ideal retirement scenario for returns.

I've written my goal in retirement is to shoot for a return equal to 3X the risk-free rate of return. In other words, if the 10-year bond yield is at 3%, I am looking for a 9% return on my portfolio.

With a 4% – 6% annual target, I never went beyond a 75% equity weighting in my portfolio since 2012. Further, a large part of my equity investments were in structured notes that had downside protection with sometimes capped upside and sometimes leveraged upside like the one here.

My goal was to try and sleep as soundly each night without letting investing FOMO get the best of me. Investing FOMO is what crushed a lot of cryptocurrency investors after the collapse of FTX, the formerly second-largest crypto exchange.

With an average synthetic equity weighting of around 70% since 2012, my public investment portfolio ended up returning closer to 8.6% compounded. With $0 contribution, my public investment portfolio would be 65% more than I was already comfortable living on.

But since 2012, several other fortuitous things happened:

1) Bought and remodeled a ocean view fixer in 2014 that is up about 40% based on a comp that just sold last month. At the time, a large CD came due so I took some risk and leveraged up another $1,000,000.

2) Held onto my previous primary residence that I tried to sell in 2012. By holding it until mid-2017, it grew at a compound return of 11.3%. Since the property was 55% leveraged on average, the cash on cash return was closer to 23% a year for five years.

3) Stayed consistent writing on Financial Samurai 3X a week. As a result, Financial Samurai has grown at a faster clip than the property I sold.

All of these investments have been heavily boosted by a bull market since I left work. I was lucky the real estate market continued to perform well after I took on more debt. Otherwise, I'd be feeling the heat. I wouldn't have been able to sell the PITA property I had in 2017 at the price I got.

Given my content is more measured since I've written extensively about the dot bomb period and the 2008-2009 financial crisis, maybe FS would attract more readers during slow times compared to sites that only discussed the good times.

Experience matters during downturns. Further, sales for my severance negotiation book have ticked up as layoffs increase.

A Bear Market Is Still Risky For Retirees

If a bear market hit within two years after I left work in 2012, I'd give myself an 80% chance that I would have aggressively tried to find a full-time job again. The pain of losing money in retirement would simply be too much to sit idle. At the very least, I'd consult for some fintech companies part-time.

A bear market would have crushed my hopes of being a stay at home parent no doubt. Maybe our son would have never come because we'd be too stressed out about losing so much money after leveraging up with neither of us having any jobs!

Please realize your financial independence number is not real if nothing changes in your life after achieving it. Only if you take action to improve a suboptimal part of your life can you truly call yourself financially free.

Don't Get Too Greedy With Your Finances

If you are close to financial independence or were able to retire, it's not worth taking excess risk when you could potentially lose a lot of time and money. If you invest in funny money assets, as opposed to real assets, like stocks, you could easily lost of money.

Please do not forecast the good times will last forever. You've got to bake in some flat or negative returns when you do your retirement modeling.

You must always stay on top of your risk exposure. If you can continuously save in retirement while doing something to keep you active that makes money, all the better.

If you can retire in a bear market, then your finances will have been thoroughly battle tested. Therefore, you can likely remain retired forever. Besides, when times are bad, it's easier to leave things behind.

A Silver Lining Of A High Inflation Environment

The one silver lining about a bear market due to aggressive rate hikes is that it's easier to generate more passive income. With higher interest rates, risk-free assets like Treasury bonds offer higher yields.

Personally, I've been able to boost my passive investment income by about 10% thanks to the 2022 bear market. I've bought Treasury bonds and am seeing my rents go up as well. When the bull market returns, asset value increases should more than make up for any decline in risk-free income.

In a scenario where you have so much money it doesn’t matter when you retire, then feel free to leave whenever you want.

Generate Retirement Income Through Real Estate

Real estate is my favorite way to generate retirement income. It is a tangible asset that is less volatile, provides utility, and rises with inflation. By the time I was 30, I had bought two properties in San Francisco and one property in Lake Tahoe. These properties now provide about $150,000 in retirement income.

In 2016, I started diversifying into heartland real estate to take advantage of lower valuations and higher cap rates. I did so by investing $810,000 with real estate crowdfunding platforms. With interest rates down, the value of cash flow is up. Further, the pandemic has made working from home more common.

Take a look at my two favorite real estate crowdfunding platforms. They are free to sign up and explore.

Fundrise: A way for accredited and non-accredited investors to diversify into real estate through private eFunds. Fundrise has been around since 2012 and has consistently generated steady returns, no matter what the stock market is doing. For most people, investing in a diversified eREIT is the way to go. 

CrowdStreet: A way for accredited investors to invest in individual real estate opportunities mostly in 18-hour cities. 18-hour cities are secondary cities with lower valuations and higher rental yields. Due to strong demographic trends, 18-hour cities potentially have more upside. If you have a lot more capital, you can build you own diversified real estate portfolio. 


Recommendation To Protect Your Wealth

If you retire in a bear market, you need to be all over your finances. Sign up for Empower, the web’s #1 free wealth management tool to get a clear overview of your investments.

Empower clearly shows how your net worth is allocated. It can also help you get a better handle on your retirement cash flow needs. The more you can stay on top of your finances, the better you can optimize your wealth.

Personal Capital Asset Allocation - retire in a bear market can be dangerous but good
Log onto dashboard and click Investing -> Holdings to get an overview of all accounts

Why It's Better To Retire In A Bear Market is a Financial Samurai original post. I've been writing about FIRE since 2009.

About The Author

38 thoughts on “Why It’s Better To Retire In A Bear Market Than In A Bull Market”

  1. I keep playing this scenario in my mind as we continue along in our current long running bull market. I do not want to retire now when my net worth in investments could be over inflated due to a strong stock market. I would like to retire when my net worth says I can, in a bear market. Would feel much more comfortable in that scenario and feel it would give a better representation of my actual net worth.

  2. To me, a scenario of retiring in a bear market than in a bull market is simply workable. I have seen many seniors get retire quite late and that thing put them in trouble because of the age factor. So, its better to retire on time and then plan your finances according to your financial issues, assets and what you want to achieve in retirement life. Thanks for writing on a cool topic!

  3. While the financial benefits of retiring in a bear market are quantifiable, I wonder about the psychological impact. Retirement is never just a financial matter. Is it easier on the newly-retired psyche to retire during a bull market? I’m recently retired myself and dealing with the usual psychological and emotional challenges (who am I, what’s my purpose, etc). I can tell you that dealing with the current market conditions in addition to those challenges isn’t easy. My brain knows we will be ok, but the heart doesn’t always agree. I’m curious about your thoughts on this!

  4. Hi Sam,

    I keep saving and investing while I am still in the employment. I do not care how the market fare. I know that the dividend will still be credited into my bank account using the dividend investment.

    You mentioned a good point on the retirement in the bear market. This is the time in which fear plays a great part amongst the investors.


  5. For me, the plan is to step down work. I am not sure if I can or will make a side business that pays, but there is contract work out there for software engineers. My plan is to work for about 10 more years or so, depending on the market returns. After that, then it’s to work a lot less. If we get lucky, that day may come sooner, but it seems most likely that it will not. With all of this, the answer seems to be to find, and to foster options.

    Like so many in so many fields, not least of all tech as I am, burn-out is coming to me. I can keep doing it, but as each year goes by, more and more I don’t want to. This makes my desire to save and save stronger and stronger.

  6. Torbjorn Enger

    Have ypu considered beeing 100% in stocks, and have an in/out rule? I have tested an in/out rule for using 365days average as the in/out trigger. It outplays the index, even with the cost of spread on the product and cost of buying and selling. The most important thing is that when you go from accumulating to withdrawing, it goes even better, because the downside is even less. I hav tested it on the Norwegian osebx index from 1983-2018, and it works perfectly. You get som odd timea when you gonin and out a few times, but then you remain in when index is over tje average, and vica verca.

    1. I believe coupling this entry/exit stop loss strategy with options probably would have higher yields and lower P/L standard deviation. There are multiple variations of synthetic options strategies to reduce portfolio volatility. One variation of this strategy is to just use very simple covered call strategy that can be seen in this presentation. https://www.tastytrade.com/tt/shows/market-measures/episodes/why-we-manage-our-own-money-10-09-2018. Pay attention to pages 7 and 9 which show better P/L and reduce P/L volatility than just holding S&P which is the index this strategy example is compared against. I have used similar strategy and/or its variations on the stocks I long in my taxable account for about 9 years before I ran into this presentation with back test data. I have not yet implemented similar strategy on my IRA accounts due to my time constraints and I wonder how much money I have left on the table over the years. LOL.

  7. Nice analysis. I agree its better to retire in a bear market, but would not a 4% withdrawal rate be too aggressive. Wade Pfau recommends a 2.7% withdrawal rate from a volatile moderate portfolio. Maybe with Real Estate that might allow you to generate more passive income than just from straight stock and bond portfolio.

    My portfolio is about 3.6 million not counting primary residence. Of course, I don’t have real estate, and I do not intend to withdraw anywhere near 120K.

    Your structured DJIA notes were interesting. I had actually never heard of those before. I was wondering if you could elaborate on them.

      1. Sam,

        Have you investigated the notes under the hood as to how the banks/brokerages exactly make money off the buyers. Some hidden management fee? Commissions? I probably can simulate similar performance with short calls and/or long puts (i.e. collar) every 45 to 60 days without losing control of the capital over forever periods the notes are designed for. But then there is a very widespread misconceived notion across 99% of the retirees that options are risky, dangerous and need too much work. That is not true once you get to learn the basics. If I were to simulate the structured notes using the strategy, it may take me a minute or two to decide what call and put strikes I would use every 45 days. That is less than 12 times a year!

          1. As much as I would want to, I just don’t have any bandwidth left to help others for the time being. I do consider creating a blog in the future to help others to produce extra yields without incurring additional risks. The option based strategy seem to be complicated, but probably it can be made easier to understand and implement for the average folks.

  8. David Hamilton

    Dear FS,
    I am 32 years old and work as a management consultant earning $135/year and my wife pulls in about $100k/year working part time as a nurse
    We have 75% equity in our house and good low mortgage with a view to paying it off.
    Desperately, desperately keen to continue following this approach and retire early (esp by 40.
    We have $1.29mn in savings and about $650k in the house. The savings have a 60/40 equity split that is comprised of tax free accounts, rrsp’s and about 152k in a CD. The total all in yield of everything is about 2.2%. The investments are in tracker funds
    Given the nature of the current equity market I really genuinely wonder whether I’m steering us off a cliff ploughing so much money into stocks and bonds on a monthly basis.
    Should we consider switching our monthly savings into real estate crowdsourcing or an alternative income stream to gain more diversity ? Or even withdrawling some to deploy elsewhere

    If we save 50% of our after tax earnings do you think we are on track to make it ?

    Thanks in advance for the help

      1. Thanks for the vote of confidence
        We reckon we need no more than 76k per year to retire and live a comfortable life; we live in a city that’s very affordable .
        So really that means perhaps a nest egg of $2mn with house paid off would be sufficient and even allow us to grow our capital (notwithstanding the point of this article, ie might be better not to try to retire this side of the bull market!)

  9. Anyone switching jobs or careers right now makes me nervous. Which is odd for me because I like telling people to pursue things and be where they might be happier. The last hire first fired motto still rings in my head especially in uncertain markets. This is sound advice for sure Sam!!

  10. Definitely agree with this one. I have two fairly financially competent coworkers that are essentially waiting on the next recession to retire. Sure one could argue they would have the same reduction retiring before or after of the existing assets, but by waiting you have an idea of the size of the reduction beforehand. While predicting a crash or bottom is impossible, the odds of a 50 percent crashed market dropping another 50 percent without major impetus are low.

  11. All things being equal, if you retire at the top rather than at the bottom you will have a lot more. Then you can sell and wait for the bottom and buy again. Then you will have a lot more. I much prefer that scenario.

    1. Sure, that’s a great scenario. Unfortunately, nobody can time it right. The best case really is that a bull market ensues AFTER you have decided you are comfortable enough living off what you have.

  12. I agree with your assessment that if you could pick a time to retire, the bottom of a market would be the best point because as you said, your portfolio would have been battle tested and the next few years of recovery would turbocharge your investments to support your annual safe withdrawal rate indefinitely.

    Conversely the worst time would be to retire at the top of a market and then have your sequence of return risks play out. Luckily there are ways you can combat that risk by modeling your portfolio prior to leaving work.

    Fortunately most of the early retire group are very adaptable and no one is forcing you to always withdraw the same amount each year.

    1. Sequence of Returns means that you’ll end up with MORE if you retire at the top of the market and less if you retire at the bottom. This is basic math. If you begin withdrawing after your port has already taken a 20% hit, then you will end up with less than if the bear market occurred say 10 yrs into your retirement. “Recent research from Vanguard shows that investors who retired during or near a bear market were 31% more likely to run out of money, had 11% lower retirement income streams and left bequests that were 37% smaller”.

  13. Can’t agree with you more, Sam. Since I am retiring in March 2019, I have been very risk-averse and have increased my allocation of cash and short-term deposits. When short-term deposits pay 2% to 3%, why take the risk buying at the top of the market cycle? I realize that I a may not be keeping up with inflation, but principal preservation is my main objective.

    1. I love, love 2.5% money market rates! And with the 10-year over 3% and munibonds yielding 3.5% after tax, having such investments sure feels good, especially now.

      I hope readers have kept an open mind about these articles I’ve written over the past couple of years:

      The Case For Buying Bonds: Living For Free And Other Benefits
      The Allure Of Zero Coupon Muni Bonds: Low Risk, Decent Yields
      Build A CD Step Stool Not A CD Ladder

      and more…

      It’s tempting to be all cheerleadery about investing in a bull market, but I’ve been burned multiple times in the past to not stay measured, especially with readers who’ve only seen a bull market.

      1. Sam

        good point…

        I am just wondering right now if it’s better for anyone to sell AAPL position (still up vs past 7-8Y) and move to money market/CD and use the cash in 1-2y when the recession likely will be over (in real estate or low cost index fund) or to keep them for the long run…

        what’s your opinion on this ?

  14. Makes a lot of sense! I’d rather be in a situation that motivates me to be conservative with my cash and investments and get it to last as long as possible versus thinking things will go up forever and get too lax with spending and risk running out!

  15. Good post. Retiring in the worst of times definitely adds some battle scars to your portfolio and mental psyche. If you can leave the W2 income in the worst of times, you’re likely capable of withstanding a bear market’s impact on your financial position. Assuming you maintained exposure to the market and are living off less than you earn, you should have upside ahead of you.

    It would be very cold comfort retiring at the top of a bull market thinking you’ve had your final day at the office only to ask to return shortly thereafter.

    One question from your post though. I’m curious why you chose the DJIA structured note as opposed to an S&P 500 one. Did you have higher expectations big caps in the Dow would outperform the larger cross-section of firms in the S&P 500? Plus, there’s little tech in the Dow. The S&P 500’s largest components are tech firms, which have been the standout industry since the recession.

    1. The DJIA was the note that was offered at the time that was also 100% principal protection guaranteed, which is something I needed as a new retiree. And if you look back at the performance since, it’s been about the same. I have S&P 500 notes as well.

      Sometimes you got to invest in what’s available, especially if you believe there is a rising tide.

      1. Well, that makes sense. You can only choose among choices available to you. It’s one of those times when you’re at the bottom of the ocean so you might as well catch a fish.

        Did you structure the note yourself or did you go through a broker/bank to purchase the product? I imagine the bank might have them for lower fees than doing the transaction yourself given their scale.

  16. Your bear market scenario didn’t quite make sense to me. How did the portfolio grow so much in a bear market? The $3 million portfolio should decrease and the purchasing power would drops along with it for a few years. Seems like it’d be a better fit if you look at someone retiring in 2008/2009, right at the drop. I guess you’re saying retiring in a bear market means retiring after a big crash. So the $3 million portfolio used to be bigger.

    1. It doesn’t make sense because it’s not really a fair comparison.

      The bear market retiree started with $3.8M at peak where the bull market retiree peaked at $3M. Both will experience a bear market once but the second person starts with $800K less.

      The “bear” market retiree is the real bull retiree because he’s retiring at the start of a bull market.

      The “bull” marker retiree is the real bear retiree because he’s retiring at the start of a bear market AND got hit with an extra $20K worth of expenses per year and a forecasted $70K/year expense in 5 years time.

      That’s really stacking the deck against the 2nd person and making what is already obvious (retiring into a bear market sucks) total overkill.

      What is more interesting would be an analysis of the typical FIRE portfolio if the US got hit like the lost decades of Japan and the S&P 500 looked like the Nikkei 225 from 1990 and 2010…

      1. Life is stacked against everyone.

        But it will be more stacked against the person retiring at the top of the market without changing their risk profile, their income assumptions, and their return expectations.

        If you have retired, at what point in the cycle (year) did you retire, and how has it gone for you?

  17. Interesting study. I wonder though if there is anyone in the real world with the talent to have saved $3 million who won’t continue to earn significant money in retirement. I stay at a zero withdrawal rate, I’m guessing you do too. It would be interesting to see what real withdrawal rates look like in the early retirement community for fat Fire retirees.

    1. Good point. I haven’t touched principal since I left in 2012, and I’ve basically reinvested all my passive income and then some given the revenue from FS. It’s very hard to withdraw any money when you’re used to a lifetime of saving and investing.

  18. I think your analysis is pretty sound, however as you state we are currently in a bull market. If one wishes to take your advice and plan on retiring in a bear market that would presume they have to try to predict when the bear market will happen. Or simply wait it out. As we all know, no one knows. This might lead to cultivating the behavior of trying to time the market or pretend you can.

    However I think it’s good advice if you don’t try to time it, but just ponce on it and take advantage of it when it happens

    1. The market has pulled back a bunch. Not sure it’s an actual ‘bear’ market, but a TON of stocks are way off their all time highs.

      1. I am impressed that big tech names are down 30% plus from their highs. Once the money is gone, what’s the point of working right? I got a reader saying just that regarding working at Facebook.

        Morale is super low now at FB.

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