What To Do During A Stock Market Crash If You Plan To Retire In 2020?

The standard answer to “What should I do in a market crash?” is “Stay the course because markets always come back.” However, this is not good advice for those in the Risk Zonedefined as the 5-10 years before and after retirement. If you are in the Risk Zone, your ability to suffer investment losses is relatively low because losses at this time in your life can reduce the asset amounts you need to fund your standard of living and the length of time your savings will last.

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Most of the options, after a crash, at this time in your life are limited to deferring your retirement date, taking a part-time job, or reducing your standard of living. These are dire options for current and future retirees who want to live a life of leisure during their golden years.

Another consequence that is impacted by lower asset amounts is rising longevity. Medical science and healthier lifestyles are extending life spans five and ten years for one or both spouses. For example, if a couple in good health retired at age 65, one of the spouses has an 80% probability of living to age 95. There can be multiple crashes in a 30-year time span.

A third consequence is the cost of living late in life if one or both spouses require Assisted Living, Skilled Nursing, or Memory Care. This expense is magnified when one spouse requires this level of care and the other spouse continues to live independently. There is a blessing and curse in this possibility. As noted earlier, medical science can keep people living longer, which means their assets have to last that much longer.

Markets may indeed recover, but no one knows how long that might take, plus there can be new reasons for markets to decline around the corner.  Importantly, your ability to create a new pay-check may be limited, so whatever you’ve saved will have to last for you and your spouse’s lifetimes.

Instead of the standard answer, you might consider the adage “If you find yourself in a hole, stop digging.”  In this case, you’d consider reducing your risk rather than rebalancing your portfolio back into common stocks. Thoughtful researchers Dr. Wade Pfau and Michael Kitces have identified an optimal asset allocation pattern for retirees. In the language of target-date funds, this pattern is called a “Glide path”, like a smooth landing for an airplane.

The optimal allocation when you start retirement should be very low risk, with less than 30% in equities (stocks, real estate, commodities, etc) and long term bonds. The remainder should be invested in Treasury bills and intermediate Treasury Inflation-Protected Securities (TIPS). This defensive allocation protects against the Sequence of Return Risk, which is the risk of substantial loss when your savings are at their peak at or near retirement dates.

Then after you’ve been retired for 5 years or more, the optimal path re-risks, increasing allocations to equities and long term bonds, up to about  50% for a 90-year-old. This re-risk extends the life of savings and contradicts the old “100 minus your age” rule for equity allocations. 100 minus age 75 would produce an equity allocation of 25%.

Interestingly, this optimal path is similar to another traditional approach that uses buckets. This bucket approach advocates three buckets as you enter retirement. In order of amounts in each bucket, the cash bucket holds the most, then the bond bucket, and then the smallest bucket is equities. Then the strategy is to spend the cash and bond buckets first, giving equities time to produce higher returns and weather setbacks. Note that this pattern starts in mostly safe assets, then spends them first, leading to increased allocations to equities – similar to the optimal path.


In answer to the question, you can follow traditional advice and ‘Stay the course”, but recent research argues for a new course, moving to safety now, with a plan to ease back in over time. Whichever you choose, we wish you well in these uncertain times.