When stock markets show slight fluctuations, financial media often react with alarm, recalling events like the 2008 crisis and the 2001 dot-com bust.
From television broadcasts to social media influencers, discussions predicting major market declines tend to attract attention but also increase worry among older Americans and retirees.
Those nearing retirement or their financial advisors might regularly assess portfolios against potential severe market downturns similar to 2008.
Ben Carlson, a portfolio manager at Ritholtz Wealth Management LLC, examined historical data and presented findings in a 2022 report for A Wealth of Common Sense.
"Bear markets and crashes are rare," Carlson wrote. His analysis indicates catastrophic market events occur so infrequently that many retirees may not experience one during their retirement years.
Even if such events occur, potential financial losses could be contained.
Individuals over age 30 have likely witnessed several significant market declines, including the 2001 dot-com collapse, the 2008 financial crisis, pandemic-related corrections, and drops following Russia's 2022 invasion of Ukraine.
While these events demonstrate market volatility, Carlson's review of data from 1928 onward suggests the frequency and severity of corrections are less alarming than perceived.
Market crashes of 30% or more occurred in only 10% of years between 1928 and 2021, according to Carlson's analysis. Declines reaching 40% happened in just 5% of those years.
A 65-year-old living to 85 has minimal probability of encountering a 40% market drop during those two decades. With proper asset allocation, the impact of such rare events on personal finances could be limited.
For example, a portfolio with 50% invested in stocks and index funds might see only a 20% reduction from a 40% market decline, with remaining assets potentially protected in fixed-income securities like bonds.
Carlson proposes a straightforward calculation to address retirement concerns. First, determine personal risk tolerance—the percentage of net worth loss that would significantly affect retirement withdrawals and lifestyle.
Divide this percentage by the equity allocation ratio in one's portfolio to identify the stock market decline needed to reach that threshold.
Consider a retired 60-year-old with 60% stocks and 40% fixed-income securities, and a maximum risk tolerance of 30%. Applying the formula: 30% divided by 60% equals 50%.
This result indicates a 50% market decline—an exceptionally rare event—would be required to necessitate retirement plan adjustments. Smaller, more frequent market corrections might be manageable given such risk parameters.
The calculation depends on individual preferences and financial situations. Those with lower volatility tolerance could reduce equity exposure, while others with higher risk capacity might adjust asset allocation accordingly.
This data-driven approach, tailored to personal circumstances, offers an alternative to sensationalized media commentary and may provide reassurance for retirement planning.