How to Protect Your Retirement Fund From a Stock Market Crash
The stock market is volatile, but most of us keep our retirement savings in our unpredictable grip. So what will you do when the stock market crashes before the day you decide to retire?
Contrary to media reports, people in this position rarely “lose everything” unless they have invested in penny stocks or other clearly risky assets (as opposed to safer mutual funds and ETFs). The stock market is cyclical, and historically there have been major crashes about every ten years. It is impossible to predict the exact time of each accident , so every time it happens, an avalanche of fear and anxiety ensues.
Usually the best strategy to deal with an accident is to just survive. If anything, see if you can buy more at lower prices. But when you’re about to retire and your nest egg is cut in half, that prospect gets much scarier.
Do not change course
In fact, your position when you are close to retirement is not much different from that of someone younger who can afford the luxury of getting over an accident.
If this sounds surprising, it is because of the relatively common but unspoken assumption that the value of your nest egg stops growing the day you retire. Without phrasing it, many people think that if the stock market crashes, say six months before retirement, they are doomed because they don’t have the luxury that their younger compatriots have of breaking through and allowing their investments to recover.
This assumption is incorrect because it misses two key facts:
- If you are like most people, you will probably live another twenty years or more after retirement, which will leave you more than enough time to survive not one but several stock market crashes.
- In retirement, what matters most to you is not the one-off value of your portfolio, but the stream of income it offers you.
So while this accident can be even more difficult to get over, try not to let it bother you too much.
Focus on profitable investments
As we approach the release date for retirement is important to think not so much of a lump sum of nested eggs, but about how you will live through this.
First, formulate your monthly budget. Our society today is built on a monthly financial cycle. House and car bills are monthly, as are utility bills, telephone and cable TV bills. If you are applying for social security, it will be paid monthly. Therefore, it is important for you to figure out how your retirement fund will cover these monthly bills.
So, convert your investments into things that generate monthly or quarterly returns. When the stock market crashes, these investments continue to generate monthly or quarterly returns. Here are some alternatives.
Bonds
The older you get, the more you should be shifting your investments from stocks to bonds . Thus, by the time you retire, a significant portion of your bird’s egg will be in less volatile assets. Most people invest in bonds through mutual funds or ETFs because bonds are difficult to invest in “direct,” that is, physically buying real bonds. (Single bonds are around $ 1,000 apiece, and transaction costs are high. If you want to buy a diversified portfolio of bonds, you are talking about money more than mere mortals should invest.)
However, keep in mind that as interest rates rise, the value of bond funds will fall. Of course, this is not as dramatic as the drop in the stock market, but this drop also has frightening potential, so stay calm and carry on. If you focus on the income you get from bond funds and ignore their value, a stock market crash won’t have much of the same meaning to you.
Rental Property
Buying a house or apartment in your neighborhood and renting it out is often a good investment. The rent comes in every month, whether the market crashes or not, and most leases have escalation clauses built into them.
However, there is a risk that a recession – which invariably follows a stock market crash – could cause tenants to delay rent or skip payments altogether. In addition, to buy a rental property, you will need a significant amount of change, usually $ 50,000 or more. Taking on debt as part of a rental investment increases your risk because you will be on the hook for payments when tenants are suffering from an economic downturn and cannot pay their rent on time, or worse, they may not pay. able to pay rent at all.
Most of the time, however, rental income is largely immune to stock market shocks and can pay off the work you put in .
Annuities
Annuities are products sold by financial services companies. Usually you buy it in a lump sum and in return it pays you a regular monthly payment. Basically, it pays for your investment and interest / income over so many months. These payments are largely independent of the state of the economy or the stock market. Annuities are popular with a lot of people who say, “I don’t want to get involved with investing, I would rather have a paid professional take care of everything.” this is for me “.
The key word in this sentence is “paid” because these paid professionals are not cheap. They are often marketed as timeshares, high-level agents. These costs are paid in advance, and ultimately the question is whether the additional income of professional investment managers offset the higher costs. They often don’t. So for those who are very risk averse and / or don’t want to spend time investing at all, annuities remain a viable alternative, as if someone was washing your car or tending to your lawn. It’s expensive, but it’s best to do nothing.
Dividend shares
If you do not want to withdraw a lump sum from your investment portfolio for real estate or annuities, and do not want to risk the rise in interest rates due to the depletion of your bond funds, you should consider another type of investment: dividends. stock. As you approach retirement, you can trade mutual funds, ETFs, and stocks that you own and buy dividend stocks instead.
You should consider two types of dividend-paying stocks:
Dividend Aristocrats: This is an elite group of stocks, about 50 or so, that have been paying rising dividends for 25 years or more. It is important to note two things about this class of stock (you can read more about them here ):
- These dividends have been paid out steadily for at least two stock market crashes and busts.
- Not only did they keep paying these dividends for so many years to get on this list, they had to increase their dividends every year.
Aristocratic dividend stocks give you the flexibility to choose how to invest in them: you can buy one or more stocks and build your own portfolio, or you can buy an ETF or index fund that offers more diversification for a small fee.
When the stock market crashes, the prices of those stocks also fall. But if you hold them for dividends, that doesn’t concern you, because they are the bluest blue-chip stocks, and those prices will recover with the market.
Preferred Shares: The second special class of dividend-paying shares are preference shares. Some stocks have higher dividends than other stocks, but dividends never go up. Others have a variable dividend rate. Preferred stocks are almost like bonds in that they pay quarterly dividends. However, they are much easier to buy – they trade in the same way as regular stocks, so you can buy as many as you like. As with dividend aristocratic stocks, you can invest in preferred stocks through ETFs or mutual funds .
As you approach retirement, you need to rebuild your retirement funds so that they provide you with the monthly or quarterly income you need to live the life you have worked so hard for.
If you are close to retirement , now is the time to make these changes. If you have a portfolio of the types of investments listed above, the inevitable stock market crashes that will be part of your rest of your life will largely not affect you.