This Could Drain Your Retirement Savings Faster Than a Bear Market

You'll often hear that a stock market downturn is retirees' biggest threat. And the truth is that a prolonged bear market could hurt you financially in retirement if you aren't prepared.

The good news is that there are fairly easy steps you can take to avoid locking in portfolio losses during a bear market. The right asset allocation could offer protection, as could a solid cash cushion.

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If you keep enough cash on hand to cover one to three years' worth of living expenses, for example, that potentially gives you the option to leave your portfolio untouched until stock values rebound.

But while you may know ahead of time to plan for a bear market in retirement, there's another income drainer you should have on your radar: inflation. And if you don't come up with a strategy to beat it, your savings could get drained fairly quickly.

Why you need a plan to beat inflation in retirement

Bear markets tend to happen when economic activity slows, corporate profits drop, and investors get spooked. When stocks are overvalued for extended periods, that, too, can set the stage for a bear market.

Bear markets aren't always predictable, but there can sometimes be signs they're coming. Inflation, on the other hand, is usually more subtle.

Over time, the general cost of living is likely to increase. If your retirement savings can't keep up with inflation, you might slowly lose out on purchasing power from year to year. And the cumulative effect of inflation could be substantial, eventually causing you to run out of savings despite starting with a decent balance in your IRA or 401(k).

That's why you need a plan to beat inflation, just like you need a strategy for coping with market downturns.

How to protect your retirement savings

While inflation is a factor every retiree has to deal with, there are active steps you can take to get a leg up. First, make sure you're investing in assets that can beat inflation, like stocks.

It's generally a good idea to reduce portfolio risk in retirement, so an IRA or 401(k) that's 90% stocks isn't necessarily optimal. But too small an allocation could cause your savings to trail inflation. You may want to aim for a fairly even stock/bond split so that a portion of your portfolio outpaces rising costs while the remainder provides stability.

In addition, consider delaying your Social Security claim. For each year you hold off on taking benefits past full retirement age, which is 67 for anyone born in 1960 or later, your benefits grow 8%, up until age 70.

The reason a delayed claim works well as an inflation hedge is that Social Security benefits are subject to an automatic cost-of-living adjustment (COLA) each year. If you start with larger monthly checks due to delaying your claim, each COLA that arrives should put more money in your pocket.

And remember, Social Security is guaranteed to give you a monthly paycheck for life. Even with smart planning, your savings could eventually run out. So boosting those benefits is a great way to buy yourself more financial protection for the long haul.

Don't let inflation wreck your senior years

Bear markets tend to be in-your-face events. And while they're not always predictable, signs can emerge that a downturn might happen sooner rather than later.

Inflation may not seem like an equally large threat to your retirement finances at first. But the reality is that the risk is pretty high, especially if you end up living longer. So it's important to have a strategy for staying ahead of inflation to avoid a cash crunch and depleted nest egg down the line.

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