A steep drop in the stock market can be particularly devastating to retirees, who have few options to replace their depleted life savings. But there are a variety of ways for retirees to prepare for and cope with stock market declines so that their day-to-day income needs continue to be met, regardless of market conditions. Here’s how to protect yourself from stock market risk in retirement:
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Shift to more conservative investments. As you enter retirement your mindset shifts from accumulating assets to protecting what you have saved. To do this, many people reallocate their investments to become more conservative over time. “You have to prepare your portfolio to go from saving to spending,” says Eric Nelson, a chartered financial analyst and managing principal at Servo Wealth Management in Oklahoma City, Oklahoma. “If you were 100 percent stocks going into retirement, for most people you don’t want to be 100 percent stocks in retirement.”
However, the shift to more conservative investments should be gradual and you might want to keep a portion of your nest egg in equities to take advantage of stock market growth. “For someone in their 80s or 90s, I would still have a 30 to 40 percent equity exposure,” says Lois Basil, a certified financial planner for Basil Financial Group in Chicago. “We want to build out safe investments, and that means money in checking and savings and either CDs or U.S. Treasury STRIPS, and we use the equity portion of a client’s portfolio to get returns.”
Some funds, such as target-date funds, will automatically change their mix of stocks and bonds to grow more conservative over time without any action required on the part of the investor. However, it’s a good idea to make sure that you are comfortable with the glide path, or rate at which the fund shifts its holdings to become less risky. Target-date funds are designed to work for most people who share a target retirement year, but depending on your other investments and personal risk tolerance, they might not fit everyone’s needs.
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Create a cash reserve. Don’t keep money you will need to pay for living expenses in the next few years in the stock market. Instead, retirees need to keep enough money to cover several years of costs in cash or other safe investments that have little to no risk of declining in value. “Make sure you have enough money in cash and savings accounts for all short-term income needs,” Basil says. “For any short-term income needs I would never have an equity exposure at all.”
A cash reserve will allow you to ride out stock market declines without having to withdraw money at a loss or have any disruptions to your retirement income. “This money that you need over the next couple of years should be invested without any sort of risk whatsoever,” says Benjamin Beck, a certified financial planner and chief investment officer at Beck Bode Wealth Management in Dedham, Massachusetts. “If this is money you need in the next year or two, we really recommend you keep it outside your investment portfolio.”
Avoid emotional investment decisions. Don’t make sudden changes to your investment strategy based on a panic about a drop in the market or to chase returns when the market is hot. Before you retire, make an investment plan that you can stick to regardless of how the market performs. You can’t control your stock market returns, but you can make decisions about your asset allocation and the fees associated with your investments. “Pick a target asset allocation and fill it with very high quality investments. Watch the investments on a regular basis — not daily — and don’t fret about market swings,” says Patricia Currey, a certified financial planner for Currey Financial Consulting in Edgewater, Maryland. “If you are using the money in question for living expenses, take it out of the market and use something safer from swings like a CD or a money market account.”
[See: How to Pay Less Taxes on Retirement Account Withdrawals.]
Continue to invest. Your retirement could last for 20 or 30 years. This long time horizon makes continuing to invest a portion of your assets in the stock market throughout retirement worthwhile. Inflation can erode the purchasing power of your retirement savings over time, but you can also take steps to help your nest egg keep pace with the rising cost of living. You could shift a portion of your portfolio to investments that have historically kept pace with inflation such as equities, commodities or real estate. Your Social Security payments and some types of government bonds are also automatically adjusted to keep pace with inflation. “When you are 65 you are still investing for the next 20 or 25 years of your life, and you’ve got to make sure that your portfolio is not whittled away by the silent affects of inflation over time,” Beck says. “You need to protect your purchasing power and make sure you outpace inflation, and you have to participate in the market in order to have that.”
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How to Cope With Stock Market Declines in Retirement originally appeared on usnews.com
