Markets are swinging and fears are mounting. What does that mean as retirement looms?
The final week of February was a brutal one for the stock market, as fears of a worldwide coronavirus outbreak sparked a massive sell-off. Now you’ll often hear that you don’t have to worry about losing money in a stock market downturn as long as you sit tight and leave your investments alone until things stabilize.
But what if you’re right on the cusp of retirement and therefore don’t have that luxury? Are your golden years doomed?
While your retirement savings may not be immune to the market’s recent bout of volatility, there are a few things you can do to ensure that your long-term plans aren’t destroyed by what’s ultimately bad timing.
1. Keep calm
It’s easy to panic when you log on to view your IRA or 401(k) balance and see that it’s dropped significantly. But perhaps the most important thing you can do is avoid panicking. Stock market corrections are often short-lived, lasting weeks or a few months, not years. Therefore, if you’re not retiring tomorrow, or next month, there’s a good chance the market will have recouped some or all of its recent losses by the time you’re ready to pull the trigger.
2. See if you can pay your living expenses without tapping your retirement portfolio
You only lose money in a market downturn when you liquidate investments at a time when their value is down. Now if you were to remove a chunk of your IRA or 401(k) right now to cover upcoming retirement expenses, there’s a strong chance you would, indeed, lose money. But if you have another way of paying your bills, you may be in a good position to forge forward with your retirement plans without taking losses.
Say you were planning to retire next month, and you expect to need $4,000 a month to pay your bills. If you’ll be getting $1,500 a month from Social Security, and have a decent amount of emergency savings, you may be able to live off of those cash reserves, thereby leaving your IRA or 401(k) alone while the market recovers. Similarly, you may have the option to work part-time to generate income that your IRA or 401(k) would otherwise provide.
3. Make sure your portfolio contains appropriate investments
It’s never a good idea to dump your stocks in advance of retirement, since you need them to continue generating growth in your IRA or 401(k) once your time in the workforce comes to an end. But as you get closer to retirement, you should increasingly add safer investments to your portfolio, like bonds, for protection during volatile periods like the one we’re currently experiencing.
In other words, let this recent downturn serve as a wakeup call to assess your savings and make sure you have a decent split of stocks and bonds. There are different percentages you might play around with, and those will depend on your tolerance for risk coupled with the extent to which you’ll rely on your portfolio for near-term income. But generally speaking, a 50/50 split between stock and bonds is appropriate for someone in his or her early 60s.
4. Consider postponing retirement
To be clear, while this recent bout of market volatility is scary to anyone who’s nearing retirement, it’s really only a major problem for someone who’s aiming to retire in the next few weeks or months. But what if you happen to be that someone? In that case, you may, unfortunately, need to consider pushing back your workforce exit until market conditions improve.
But remember, we’re not necessarily talking about delaying retirement for years. You may, for example, look at retiring in June instead of April, or over the summer. If you keep tabs on the market, you’ll know how it’s doing in terms of recovery, and that will help you better nail down your timing.
Whether the market tanks because of a virus, political unrest, or economic turmoil, the results are the same: Your portfolio can lose money on paper (or, nowadays, on screen), and that’s unsettling when retirement looms. The good news, however, is that historically speaking, these downturns are often temporary, and while the current one we’re experiencing is undoubtedly stressful, a calm, strategic approach on your part can help ensure that your retirement plans aren’t wrecked.
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