How to Prevent a Market Crash From Making Your Retirement Memorable
For those decades away from retirement, market fluctuations are only part of the investment process. As long as your asset allocation matches your risk tolerance, you can more or less relax, ignore the daily moves, and turn CNN off when things go wrong. But for new retirees and those just a few years away, the collapsed market is a more daunting prospect.
If that’s you, you need to start converting some of your assets into a less risky mix. First, a little caveat: don’t overreact to minor recessions or day-to-day fluctuations, even if you’re close to retirement age. Jonathan Clements, founder of Humble Dollar, writes for Money.com :
Even if a market crash lowers the value of your stock portfolio by 20 or 30 percent, it is unlikely that your total wealth has diminished so much. After all, you may have money in bonds and bank accounts, the house you own, your future Social Security benefits, any pension you are eligible for, and – perhaps most importantly – your ability to earn income. , – all this remains unchanged. more valuable than ever.
“Looking at portfolio losses as a percentage of your net worth can be a lot less intimidating than looking at portfolio losses in absolute dollars,” second Dirk Cotton, who blogs at Retirement Café .
All of this suggests that the downturn in the market in the early years of retirement could affect everything else. If you need to sell shares at a lower price to cover the cost of living, you will have fewer shares from which you can continue to make money in the future and sell in the years to come. You can see how this stacks up . Almost pensioners in 2000/2001 and 2008 are well aware of this.
While some of the liquidity, which we’ll talk about in more detail below, is your friend, that doesn’t mean you need to be in full cash. In fact, it shouldn’t be. For example, if you are in your 60s and in relatively good health, you may be in retirement for several decades. “You still need to make some money,” says Terry Eisert, founder and owner of Eisert Wealth Management in Cincinnati, Ohio.
“We can’t afford to step back and say, ‘I did it,’” Aysert says. “You have to keep doing what you did to get there.” This means that you continue to invest some of your assets in a variety of low-cost mutual funds and ETFs.
How much more to invest depends only on you and how much you can digest. If the thought of a sharp drop (remember: 2008) makes you nervous, then you need to rethink your asset allocation with the help of a financial advisor. You’re looking for a middle ground between an over-conservative and over-aggressive attitude towards money, which of course is easier said than done. This is where the bucket strategy comes in.
As Kiplinger explained, a bucket strategy means having three baskets of assets leading to disposal :
You divide your retirement money into three parts: one is for the cash you’ll need for the next year or two, including basic expenses like a vacation, a car, or a new roof. The next is the money you will need in the next 10 years. The last bucket is for money that you will need in the more distant future, either for you or for your heirs.
The cash reserve is what we’re focusing on here. While cash can mean lower profits, it also means you will have safety and peace of mind during these tough years. You have this liquid monetary base to capitalize on as long as your investments remain in the market and hopefully you can recover from the downturn. As Kiplinger writes, this is the first bucket for when you need money now . (If you want to customize your stock holdings specifically, this article has a few suggestions .)
As the New York Times points out , another way to prevent a market crash that will hurt your retirement is to keep working or go to a part-time job. This way, you are not dependent on the daily costs associated with hatching from your bird’s egg. Of course, this is not an answer that will appeal to those looking to relax, and it is not an option for everyone, especially those with health problems or who have been fired.
But if you can handle it, working even six months longer can have a huge impact on your bottom line – it keeps you from selling at low prices, you can probably save a little more, and you are potentially delaying social media adoption. Security is a little longer. This is a win-win.
Remember also that your withdrawal rate is not suitable for everyone. Financial advisors offer a rate of four percent, but that doesn’t mean that every year will be the same. Likewise, your expenses are bound to fluctuate.
Finally, take this as an opportunity to take a full look at your financial picture . Whether you are approaching retirement or just retired, you have to control your investments, income, expenses, holdings, net worth, etc. Putting it all in order will help you get rid of unnecessary things and enter the market. leans into perspective.