10 years out: retirement and market volatility
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You might not be able to control the stock market, but you can control how you react to stock-market volatility. Volatile markets have been historically short-lived – research shows the average bear market lasts only one-fifth as long as the average bull market.1 If you’re within ten years of retiring, however, you might be thinking about adjusting your investing strategy to help weather the turbulence. Here are three actions you should consider to help protect your assets and put your mind at ease.
Account for immediate cash needs
Having liquid cash to cover immediate needs helps bring peace of mind. Knowing how you spend your money day-to-day will give you a sense of how much cash you need to support your lifestyle. Start by tallying your monthly expenses on needs such as housing, food, utilities, transportation and other items.
When you know roughly how much you spend each month, pad that figure a little bit in case of unexpected spending changes.3 Aim to squirrel away enough money to cover 12-to-18-months of expenses. Where should you keep this stash? A good idea is to treat it like an emergency fund, putting it in an easy-to-access high-yield savings account or similar.4 Now you can meet your everyday needs without tapping into your long-term savings.
Resist the urge to sell stocks
Retirement can last for 25 to 30 years, so it’s important to think long term. It’s normal for stocks go up and down frequently.5
While not guaranteed, stocks are likely to rebound. Look at recent history. When the stock market crashed in 1987, it was higher by the end of the year.6 Even during one of the worst bear markets, 2008 to 2009, the losses were completely erased by 2012 and stocks continued to rise for several more years.7 Sometimes the rebounds happen faster.
Because of these of ups and downs, think about your retirement savings as being invested in three different buckets: money you’ll tap for the short-term, funds you’re saving for the medium-term, and the money invested for the long-term.8 This helps give you a bit of strategic flexibility.
Adjust your risk tolerance
As you get closer to retirement, it may be time to tweak your retirement savings plan if it was heavy in stocks. You may want to balance it between protecting what you’ve already saved over the years while also allowing for some future growth. Keep some savings in stocks, but also add some low-risk investments like bonds.
We know you have a few financial goals: paying down debt, protecting your assets and future, and saving for retirement. Having a plan that lets you prioritize and evaluate how to address those goals can give you confidence for the future.
Citations:
1 Investopedia: “3 Reasons Not to Sell After a Market Downturn” by Richard Best, January 8, 2021 https://www.investopedia.com/articles/investing/021116/3-reasons-not-sell-after-market-downturn.asp
2 Kliplinger: “Covering Your Monthly Expenses in Retirement: Estimate Them, Then Secure Your Income” by Ken Nuss, April 27, 2020
3 Morningstar: “7 Steps to Estimating Your In-Retirement Cash-Flow Needs” by Christine Benz, August 18, 2020
4 The Balance: “What Amount Do Retirees Need in an Emergency Fund?” by Rebecca Lake, December 1, 2020 https://www.thebalance.com/how-much-emergency-savings-do-retirees-need-4582473#:~:text=Most%20experts%20recommend%20having%20three,life%20may%20throw%20at%20you.
5 AARP: “8 Money Experts on How to Survive This Volatile Economy” by Jill Schlesinger, May 4, 2020 https://www.aarp.org/money/investing/info-2020/interview-with-8-financial-experts.html?intcmp=MON-FEED
6 U.S. News: “30 Years Ago: Lessons From the 1987 Market Crash” by Debbie Carlson, October 12, 2017 https://money.usnews.com/investing/buy-and-hold-strategy/articles/2017-10-12/30-years-ago-lessons-from-the-1987-stock-market-crash
7 MarketWatch: “2007-09 bear market now totally erased” by Mark Hulbert, April 4, 2012 https://www.marketwatch.com/story/2007-09-bear-market-now-totally-erased-2012-04-04
8 Morningstar: “The Bucket Approach to Retirement Allocation” by Christine Benz, January 25, 2021
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