Based on a nationwide survey of working-age Americans, 79 percent believe the country faces a retirement savings crisis, up from 67 percent in 2020. Additionally, it is estimated that more than half of Americans (55 percent) 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 returns risk.” Retirees may need to sell assets at lower prices when making withdrawals from their investments. Even if the market ultimately rebounds, 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 some 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 certificates of deposit, bonds, and annuities.
- Real estate—REITs and property can provide income and appreciation over the long term.
- Social Security and pensions.
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.Related Stories
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 percent 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.
Consider a dynamic approach:
- Flexible withdrawals—When the market is strong, increase your withdrawals; reduce them during downturns. Doing this can protect your savings and take advantage of favorable market conditions.
- Guardrail strategy—Set upper and lower limits on your withdrawals.
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 the “sell high, buy low” strategy—may allow you to profit from market fluctuations. Generally, advisors recommend rebalancing once a year, although some suggest doing it 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, until age 70, increasing your benefits by approximately 8 percent per year. 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 to 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.By John Rampton
The Epoch Times copyright © 2024. The views and opinions expressed are those of the authors. They are meant for general informational purposes only and should not be construed or interpreted as a recommendation or solicitation. The Epoch Times does not provide investment, tax, legal, financial planning, estate planning, or any other personal finance advice. The Epoch Times holds no liability for the accuracy or timeliness of the information provided.
