If you’re still years or decades away from retirement, a dip in the stock market likely doesn’t cause much concern as your savings still have plenty of time to bounce back. However, if retirement is in sight, or you’re already there, any market volatility may have you worried.
It’s important to remember that you’ll likely be retired for many years, during which your savings accounts will continue to grow. You don’t need 100% of your funds the day you retire – you’ll still have plenty of time to ride out a down market. That fact alone may not provide all the reassurance you need.
Here are a few steps you can take to make sure you’re on solid financial footing during your retirement, regardless of how the market is acting.
Analyze Your Budget
The first step in figuring out if you have enough money to get by is knowing how much money you need to get by. Complete a detailed review of all the expenses you’ll have in retirement.
This is also the time to look at your discretionary spending. Many people tend to splurge in retirement on things like vacations and home renovations. Should the market take a downturn, however, these items may need to be trimmed or eliminated until your finances improve. Having them listed out makes it easy to identify what can stay and what needs to go.
Have Emergency Cash Savings
Your retirement accounts should not be your only source of money in your later years. As soon as retirement begins to approach, or even before, you should start building up your bank account.
Having a healthy bank account can limit the amount of money you’re forced to withdraw during an economic decline. This will give your retirement funds a chance to recover. Your cash should be kept in an easily accessible bank or credit union savings account.
Diversify Your Assets
It’s always a good idea to have a healthy mix of both stocks and bonds in your portfolio. But if you’re risk averse, you may want to reconsider how much of a percentage each one takes up.
Stocks generally perform better than bonds, so it’s wise to have a good amount in order to help your savings grow as much as possible. However, with great reward comes great risk. There are a host of reasons why a company you have stock in could suffer, which would then cause the value of your stock to drop. For example, from 2007-2009, when the country was in and out of a recession, the average return percentage on stocks was 5.49, -37 and 24.46, respectively.
Bonds, meanwhile, won’t get you quite the return of stocks but they offer very little risk, particularly those backed by the U.S. government. During the same three-year stretch from ’07 to ’09, average annual bond returns styed between 5-7%.
This is all to say that if you’re seriously concerned about the market’s performance you may want to consider shifting more of your money to bonds to mitigate potential loses.
Find a New Source of Income
The idea of picking up a new job during retirement is likely the last thing a retiree wants to hear, and rightfully so. But this new gig doesn’t need to be the grueling, 40-plus hours a week job we’re used to. A part-time or freelance position with a modest income can go a long toward surviving fluctuations in the market – and alleviating the stress of financial concerns.
But most importantly, this new revenue source doesn’t need to be a job in the traditional sense. It could come from something you’re already doing in your free time. These days, there is a host of ways to turn your hobby into a moneymaking venture. Since you’re likely to pick up new hobbies during retirement, or expand on ones you already have, this new “job” could be something already in your wheelhouse.
Determine a Safe Withdrawal Rate
An important step in planning for retirement is figuring out an appropriate withdrawal rate – determining how much money you can take out each year without running out during your lifetime.
It has long been suggested to withdraw 4% of your savings each year, adjusted for inflation. But during lean times, you may need to give yourself a pay cut.
For example, assume you have $500,000. The 4% rule would give you $20,000 annually. But if the market takes a drop and your portfolio is now worth $400,000, that $20,000 represents 5%. To get back to 4%, you’ll need to lower your withdrawal income for the year to $16,000.
What are your tips for saving during market downturns? Let us know in the comments below.
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