It’s never too soon or too late to start preparing for your retirement. With the world feeling more volatile than ever, the stock market is bound to encounter peaks and valleys in the coming years. Whether you’re a new investor, you’re preparing to retire, or you already have retired, it’s essential to consider the effect of the stock market on your retirement savings.
Ultimately, the stock market is unpredictable, and both highs and lows are a guarantee. However, many investors often fail to consider the timing of a potential market downturn, and how an aggressive withdrawal plan early in retirement could potentially impact portfolio longevity. Moreover, some investors will put their portfolios at risk due to their emotional response to an unexpected downturn.
To protect against this, and downturns in general, you should focus on a disciplined investment approach, a conservative withdrawal plan, and other hedge options to ensure that your portfolio is able to survive market volatility.
Sequence of Returns Risk
When you are still years away from retirement, a diversified portfolio is the focal point of a smart investment strategy. On the other hand, those preparing to retire and those already retired are exposed to the sequence of returns risk. Essentially, this occurs when a retiree withdraws too much money in early retirement during a market downturn, and the portfolio’s ability to cover the intended life span is jeopardized.
Since the retiree is “selling low” when they withdraw, they are doing exactly the opposite of what will help them remain solvent through their retirement years. More importantly, this is purely a byproduct of the order of returns, rather than the specific returns themselves. In many ways, it’s a game of luck played between bear and bull markets.
While this is something you cannot control, it is something that you can strategize against to protect your assets.
The Impact of Downturns on Defined Contribution Retirement Accounts
Current retirees aren’t the only ones subject to market volatility. In fact, the movement away from the traditional pension plan means that many people are working with defined contribution retirement accounts instead. There are both pros and cons to this change. While you are in control of your ultimate retirement destiny, you are also likely to have less definitive retirement income to rely on.
If you have many years before retirement, then you have plenty of options to grow your 401(k) and protect it against volatility. One of the most important tactics is to continue to make steady contributions to your retirement accounts, regardless of the state of the market. Be careful not to fall prey to emotions and withdraw before age 59½; this will result in a 10% penalty in addition to normal income taxes. Moreover, it’s important to become increasingly conservative as you approach retirement, as this will ensure there is a decreased loss with a market downturn. While there are no guarantees, an…
Read More: How To Protect Your Retirement Portfolio Against Market Pullbacks