Brooke Petersen, BridgeTower Media Newswires
If you’ve kept up with coverage of the stock market over the last nine months, chances are you’ve felt some anxiety and wondered when and how your personal finances could take a hit as a result of the volatility.
The market took a sharp turn at the end of 2018, with the S&P 500 dropping by nearly 20 percent — dangerously close to a bear market. More recently, stocks have slumped due to concerns about a global slowdown in economic growth.
With every downturn, headlines warning of volatility and recession splash across the Internet, investors scramble and individuals worry about the long-term fallout. Volatility is particularly concerning for pre-retirees who have spent decades building up their savings to carry them into a comfortable, well-earned retirement.
So, how can individuals proactively guard against volatility to preserve their retirement dreams? Here are a few tips “to keep calm and carry on” to retirement:
Check your balance proactively, not reactively.
Based on market performance from 1928-2018, the market sustains a 5-percent downturn every three months and a 10 percent downturn every eight months on average. Dips and swings in the market are inevitable, and reacting to fluctuating market conditions can lead to poor investment decisions.
While it’s important to keep tabs on the economic climate and arguably even more important to be aware of your investment portfolio, be careful about linking the two. Checking your balance frequently or every time there’s a dip in the market will take you on the rollercoaster that is Wall Street. One day your balance might appear lower, but the next it could be back on track.
Don’t get on the rollercoaster. Work with your adviser to develop a diversified portfolio with a reasonable amount of risk. Then, stay level-headed, trust the process, and establish a periodic time to check your balance. In times of volatility, sometimes less is more.
Maintain an emergency fund and build up your fixed income holdings.
Individuals who were set to retire in 2008 before the recession hit can attest to the importance of having fixed income and an emergency fund. Having fixed income — namely, bonds — in your portfolio can serve as a buffer to volatility. High quality bonds historically maintain their value during stock market declines.
Typically, we think of an emergency fund as a safety net for unexpected expenses or job loss. However, if the market takes a sudden dip just ahead of your scheduled retirement, it may be time to tap those funds. As you near retirement, build on your emergency fund savings — three to six months of daily living expenses set aside in an account that isn’t subject to market risk. This will provide you with a reserve to draw from if needed. If you can delay taking retirement distributions when the market is down, you can preserve the assets that you’ve worked hard to build up and maintain your vision for retirement.
Work with your adviser to determine a timeline and strategy to systematically re-allocate your assets.
As an individual, your risk exposure is at its peak in the final three years before retirement and the first three years after retirement. Early on in your career, it’s important to create a well-balanced portfolio that matches your risk tolerance and aligns with your goals. In your fifties, it’s important to re-evaluate your risk tolerance and re-allocate your assets accordingly.
For example, if your portfolio is 60 percent stocks and 40 percent bonds mid-way through your career, talk to your adviser about gradually shifting the balance to 40 percent stocks and 60 percent bonds as you near retirement. You don’t want to make any decision hastily or as a reaction to the market climate. Rather, proactively and systematically make the change over time.
Max out on your 401(k) contributions.
No matter the market outlook, wherever you are in your career, save as much as possible. When you get a raise or a bonus, increase your deferral rate so that you never “miss” that money.
The current annual limit for 401(k) contributions as set by the IRS is $19,000 for individuals under age 50 and $25,000 for individuals over 50. As you progress in your career and some of the larger expenses such as student loan debt, mortgage payments, and college tuition for children are behind you, aim to get as close to this number as possible to maximize the tax-deferred savings benefits.
To sum it up: Don’t make short-term moves with long-term money. Whether you’re a young professional, mid-career, or on the cusp of retirement, stay calm and be proactive about adjusting your investment strategy based on your goals and risk tolerance, instead of being at the mercy of the market.
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Brooke Petersen, CFP, is an investment consultant specializing in asset management and financial planning for individuals and families.
