Many retirement investors have a considerable percentage of their investment in stocks and this has generally served them well. Stocks have recently been on a roll - indeed booming – at or near all-time highs. Some pundits think the market is a bit extended. So what should you do to prepare your retirement nest egg for the next downturn?
How a Market Crash - or Even a Downturn - Can Wreck Your Plans
Here's a scenario that may be more common than you think: Sam, aged 54, has been working for 30 years and is closing in on his retirement. He has been lucky in that he was able to save a little of each paycheck and put that money into a qualified plan. He followed the general recommendations given by the plan administrator and therefore has a fairly high percentage, about 70%, of his total in stock mutual funds and individual issues. Consequently, over the years, his account has blossomed into a very nice six-figure sum.
Early 2018 was relatively rough for some investors and Sam took notice. He became more than a little concerned that his money was evaporating before his very eyes. He decided to re-evaluate but exactly what should he do?
A scenario such as this shows why it is critical to plan for any downturn, especially one that might occur in your post-working years. Take effective steps now that will safeguard your hard-earned savings, especially if you are near or in your golden years.
Steps to Take Before the Next Downturn
- Review Your Stock Holding Allocation
You may be too heavily weighted in stocks. Many advisors recommend a high percentage of stocks in your investment mix when you are young and just starting out, say 60 to 70 percent. Perhaps it is wise to begin with that allocation but as you near or are in your post-working life, a smaller percentage may be much more prudent. There is no single stock/fixed-income mix that is best for everyone. However, when the bear growls, cash is king. Having a nice percentage of your investment mix safely in cash will not only dampen the volatility of your portfolio but will give you some dry powder to buy if stocks if they become attractive.
- Tweak Your Budget
While you are at it, create a "golden-years" budget. It can be as simple or as elaborate as you like. Pay special attention to things such as health care and insurance, as well as prescriptions drugs, which may cost more as you get older. Conversely, the amount of money you spend on clothing for work or gas for commuting may decrease.
- Can You Generate Other Income?
If your evaluations indicate you may not have enough saved, consider a side-gig after leaving full-time employment. Many folks find that freelancing, advising or other such endeavors not only bring in extra dollars, but they are fun and keep the mind sharp.
- Remember: Patience is a Virtue
Finally, don't panic if the stocks head south. Position your portfolio well and realize all down markets are followed by the inevitable upswing. Having some cash will give you the ability to purchase quality issues at attractive prices.
Tanking stocks can have a big negative impact on your nest egg. Planning now makes good sense.