How to prevent market falls from threatening your retirement
Most people of working age have a retirement plan in place – after all, who wouldn’t want a comfortable and relaxed life after years of hard work? But a bearish run on the markets could seriously affect your retirement prospects. Here is how you can make sure you are never caught unprepared, even if the markets do go down before you have called it a day.
Identify how you will be affected.
Imagine that you are a regular investor and have been investing throughout your working life. With just a few years to go before retirement, your nest egg has a handsome amount. What could go wrong?
Most advisers expect that the market could turn volatile sometime within the next two to five years. The usual advice is to stay put in the market because it will go up gradually. But older investors don’t have the luxury of time on their hands. Low or negative returns can lead to a situation where you are forced to withdraw from your principal amount, leading to a vicious cycle of diminishing returns. Clearly, investors planning for retirement do not have the risk taking appetite that other investors might have.
Check your portfolio for risk.
As with any other investment, it is better to have a well-diversified portfolio. Broadening your basket greatly reduces your risk in case of a market crash. Check how much of your money is invested in stocks – are you comfortable with so much money at the mercy of the market? Will you be able to handle a situation where the markets crash by as much as 50%? Such a situation is not completely unprecedented, as seen in many high-profile market crashes. If you think you will be in a spot, you should look at reducing your exposure to stocks. Of course, the exact value will depend on your risk tolerance, your fund size and other resources that you may have as backup. Just following this simple step can help you increase your savings at retirement.
Devise a retirement budget.
If you don’t have one already, you should spend time in making a retirement budget. This will help you check your spending and determine if you can cut back on any unnecessary expenses. Try and eliminate the splurging to ensure that you have a well-pruned budget. With less spending to take care of, you will be able to significantly reduce your withdrawals in case of a market crash, giving your portfolio a better chance of recovering the losses.
Decide how you want your post-retirement life to be.
When you have a clear understanding of what you expect from your retired life, it becomes very easy to create a retirement plan. Do you want to live a peaceful life in the countryside? Or do you want to go on a world tour with your partner? Perhaps you would want to leave a tidy amount behind for your children? Your retirement goals will help you fix the amount you would like to invest in stocks, bonds or other instruments, and the amount you would keep as cash.
Decide beforehand if you are going to make any big purchases like cars or property after retirement, because you will have to provide for that as well. As always, making a sensible and calculated decision is very important for your financial well-being.
Keep some cash in hand.
To assuage your worries about the markets going down, it is advisable to also keep some cash to cover your basic living expenses like food and housing. It is good if you can have at least a
couple years’ worth of cash cover. With a cash reserve, you can let your investment portfolio recover from a slide without having to liquidate your assets and potentially reduce your future returns. But keep in mind that any cash you hold is money that is not being invested, so it is necessary to strike the right balance for your life after retirement.
Try maintaining an income source.
Do you feel like you could still work some more? Are you unsure about how to retire on time? While postponing retirement is a tantalizing option, you can still do part-time chores after retirement that will earn you a good amount. Look for work-from-home listings and neighbourhood work that will not be too taxing, but will work as an insurance policy if you don’t have easy cash at your disposal.
Seek an expert opinion!
It is natural that you might face some difficulties while planning for retirement. It is always advisable to seek a professional word of advice. A financial expert will tell you how to plan for retirement and help you devise a long term strategy to protect your valuable savings.
The markets will always keep swinging between phases of big jumps and sudden falls. But with proper planning, you can minimize the effect that these swings will have on your pocket and on your retirement plans.
Did you find this article useful? Sam Kodi offers a unique take on money through his innovative approach to financial well-being with the Six Elements model. Connect with us at www.samkodi.co.nz and learn how you too can protect your money while allowing it to grow.