Based on a nationwide survey of Americans working age, 79% believe the country faces a retirement savings crisis, up from 67% in 2020. Additionally, it is estimated that more than half of Americans (55%) are worried that they will not be able to retire comfortably.
Now, just Imagine retiring right before the market tanks. Suddenly, you’re not so comfortable with your nest egg. The thought of that can be horrifying. However, you shouldn’t let that deter you. After all, no matter what the market throws your way, if you plan well, you can weather even the worst storms and retire without stress.
Weathering Market Storms: Protecting Your Retirement
Investing is always risky, but a significant market downturn near or during retirement can be particularly challenging. The reason for this is what is known as a “sequence of return risk.” Retirees must sell the assets at lower prices when they withdraw from investments. Even if the market ultimately rebounded, you could lose significant savings and find it harder to recover.
In other words, imagine retiring during a bull market. As your investments grow, you’ll have a safety net if you decide to withdraw money. But let’s say you retire at the beginning of a bear market. It is possible that you will suffer substantial losses, such as the loss of your retirement savings.
To ensure a comfortable retirement, let’s explore practical strategies for protecting retirement funds from market volatility.
How to Protect Your Retirement Nest Egg
So, how can you protect your retirement savings from market turmoil? To help you, here are some tips:
1. Develop a versatile portfolio.
It is well known that the stock market is unpredictable. In recent years, we have seen wild swings between dramatic losses and impressive gains. Poor returns early in retirement can negatively impact long-term financial security, making this volatility especially concerning for retirees.
The good news? You can minimize this risk by diversifying your retirement portfolio beyond stocks. Consider options such as:
- Fixed-income investments. More stable returns can be found with CDs, bonds, and annuities.
- Real estate. REITs and property can provide income and appreciation over the long term.
- Social Security and pensions.
These reliable income sources can help cushion the impact of market volatility.
Over the long run, the stock market can offer substantial growth, but balancing risk and reward is crucial. In order to ensure a comfortable and secure retirement, you should diversify your investments and carefully plan your withdrawals.
2. Build a cash reserve.
When the market goes south, a cash reserve or cash buffer provides a safety net for your finances. You should have 1-3 years’ worth of living expenses in a high-yield savings account or money market fund. Doing so will avoid the risk of selling at a loss when the market dips.
Moreover, keeping this reserve allows you to ride out market storms without sacrificing your long-term investments. This gives your investments time to recover and possibly grow.
3. Create a flexible withdrawal plan.
With a fluctuating market, a fixed withdrawal strategy like the popular 4% rule may be risky. How come? You may run out of money (in down markets) or spend far less than you can afford (in up markets) if you ignore market conditions.
Instead, consider an adaptive approach based on market performance to adjust your spending.
A dynamic approach;
- Flexible withdrawals. When the market is strong, you should increase and reduce your withdrawals during market downturns. Doing this can protect your savings and take advantage of favorable market conditions.
- Guardrail strategy. Your withdrawals should be limited to both the upper and lower limits. If the market performs well, you won’t miss out on opportunities during tough times.
For retirement, think of it as a “spending speedometer.” When the market is good, it prevents you from over-withdrawing and under-spending.
4. Take advantage of dividends.
Dividend-paying stocks can be reliable — especially during market downturns. It is common for these companies to distribute a portion of their profits to shareholders, regardless of whether their stock prices drop. With this steady income stream, you won’t have to sell assets to maintain your lifestyle.
Large, established companies often offer dividends, usually less volatile than growth stocks. If you own dividend aristocrats, companies known for increasing their dividends annually, your portfolio will be more stable and predictable.
5. Consider products with guaranteed income.
In addition to guaranteed income products, annuities can provide a consistent income stream unaffected by market fluctuations. For example, fixed annuities offer a fixed income, which complements Social Security and pension income well. Even if annuities are unsuitable for everyone, they can provide peace of mind during turbulent economic times.
On the other hand, a variable annuity with a guaranteed income rider offers the best balance between growth potential and income security. With these products, you can invest in the market while ensuring a minimum income, giving you a safety net in case market conditions deteriorate.
6. Regularly rebalance your portfolio.
You may have to adjust your asset allocation over time as different assets in your portfolio perform differently. Rebalancing, which involves periodically adjusting your asset mix, helps manage risk and ensure your investments are aligned with your long-term objectives.
As part of the rebalancing process, assets that have performed well are often sold and reinvested in those that have not. This strategy, known as “sell high, buy low, ” may allow you to profit from market fluctuations. Generally, advisors recommend rebalancing once a year, but some recommend doing so more frequently.
7. Implement a bucket strategy.
You can use the bucket strategy to divide your retirement savings into different categories based on time horizons and risk tolerances. For example, one bucket might hold cash or short-term bonds for immediate expenses, another might be invested in medium-term assets, and the third might be invested in long-term assets.
If you allocate your assets strategically across these buckets, you can be protected from short-term market volatility while still pursuing long-term growth. During times of market decline, you may want to draw on your lower-risk investments but give your higher-risk investments some time to recover.
8. Delay retirement, if possible.
Adding a few years to your retirement can significantly impact your financial security. As you work, you can earn income, grow your savings, and reduce your dependency on investment withdrawals.
Moreover, delaying retirement can boost your Social Security benefits. When you delay your claim for benefits past your full retirement age, up to age 70, your benefits are increased by approximately 8%. As a result, your retirement income will be substantially increased.
9. Seek professional advice.
Navigating market downturns during retirement can be difficult. As such, it is important to consult with a CFP or retirement specialist to develop a customized strategy tailored to your personal financial situation and risk tolerance.
With an advisor’s help, you can plan tax-efficient withdrawal strategies, evaluate complex investment products, and make informed decisions about your retirement savings. Additionally, working with a qualified professional can increase your chances of achieving a secure and fulfilling retirement.
Retirement should be a time to relax and enjoy life, not stress about the stock market. By taking these steps, you can protect your retirement savings and have peace of mind knowing you’re prepared for the future.
Final Thoughts
A market downturn can seriously threaten your retirement savings. You can, however, protect your investments and maintain your quality of life by taking a proactive approach. As a retiree, your ultimate goal is to live comfortably during your golden years. Using these strategies, you can protect your portfolio from market volatility and enjoy retirement to the fullest.
FAQs
How do I diversify my investments?
Diversification is essential to reducing risk. As a result, you should spread your money across different asset classes (like stocks, bonds, and cash) and sectors (like healthcare, technology, and energy). A diversified portfolio can help reduce the impact of market volatility.
What is a good asset allocation strategy?
You should allocate your assets accordingly based on your financial goals, risk tolerance, and time horizon. Younger investors generally have a greater tolerance for risk and allocate a more significant proportion of their portfolio to stocks. An older investor, however, may prefer a more conservative approach with higher cash and bond allocations.
Should I time the market?
The market is difficult to time, and investors are often unsuccessful. In general, it’s best to invest for the long term. Dollar-cost averaging is a good method of investing a fixed amount at regular intervals to reduce the volatility of the market.
How can I manage my emotions during a market downturn?
When the market is down, it’s natural to feel anxious. Stay calm, however, and stick to your long-term plan. Whenever possible, avoid impulsive decisions driven by greed or fear.
How can I protect my retirement savings from inflation?
Over time, inflation reduces the purchasing power of your savings. Investing in inflation-protected bonds and dividend-paying stocks is an excellent way to protect your retirement savings from inflation.
Where can I get professional advice?
If you are uncertain about how to protect your retirement savings, consult with a financial advisor. They can help you create a personalized investment strategy based on your needs and goals.
Image Credit: Anna Tarazevich ; Pexels
