How Stock Market Fluctuations Affect Retirement Savings
When you invest your money in the stock market, you hope to earn profits from your investments. Over the long term, you are likely to make gains in the stock market. The S&P 500 index has averaged a return of nearly 10% annually over the past century or so. However, the index’s best year saw a return of nearly 50%, while its worst year experienced a decline of about 37%.
If a 37% decline happens in the year before or after your retirement year, it could have a significant impact on your retirement plans.
Preparing for Fluctuations in Your Portfolio
There are some ways to reduce fluctuations in your portfolio. One way is to adjust your asset allocation, which is a mix of different securities in your portfolio. Stocks tend to be more volatile than other assets like bonds. As you approach retirement, you may want to decrease the amount invested in stocks and increase the amount invested in bonds.
You can also try to increase diversification among different stocks. If you are heavily invested in one company or industry, you may experience more price volatility than if you were investing in many different stocks.
Some investors close to retirement also choose to keep more cash. They can live off the cash when the market is down, allowing them to wait until the market starts to rise again.
How to Protect Your 401(k) Account
Your 401(k) account is a benefit that your employer may offer. Typically, you will not have complete control over the investment options in your 401(k) account. Instead, you will have to choose from a list of investment options provided. This can limit your ability to reduce fluctuations in your 401(k) account, but most employers will offer some type of bond mutual fund in their 401(k) plans. You can also hold cash in your 401(k) account, usually in a money market fund.
To protect yourself from fluctuations in your 401(k) account, talk to your Human Resources department about adjusting the way your contributions are allocated among different investment options, allocating more to investments with lower volatility. You can also sell stocks in high-volatility investments to shift them to lower-volatility investments offered.
How to Protect Your IRA and Self-Saving
If you have an IRA or a taxable brokerage account that you use to save for retirement, you have more flexibility compared to your 401(k).
While many people invest in mutual funds in their IRAs, other options are available. You will be able to choose from almost any mutual fund or even decide to move money into individual savings bonds, certificates of deposit, or other securities.
If you decide to invest funds in more stable, lower-volatility assets such as bonds or a bond mutual fund, there are some factors to consider. You may want to look at interest rates, bond ratings, and fees.
Since you have more flexibility in your IRA, you can look for a mutual fund provider that offers a low-cost bond fund.
Planning for Retirement in Volatile Times
Sequence of returns risk is one of the most significant risks retirees face. A bad year in the market in the immediate years before or after your retirement can have a substantial negative impact on the success of your retirement. Investors need to have a plan to deal with poor market performance.
If
If you are still working, the simplest solution may be to work an additional year or two while the market recovers. This gives you the opportunity to save more money for retirement.
Another strategy to mitigate the risks of sequence of returns is to reduce withdrawals in bad years, avoiding some discretionary expenses like vacations.
Some retirees opt to purchase annuities to avoid this risk. Annuities provide guaranteed income in exchange for a lump sum payment. However, one downside is that you won’t be able to leave the annuity behind for heirs in the same way you can leave remaining retirement savings.
You can also combat this risk by increasing cash in the few years leading up to retirement and using that cash if the market begins to decline during the early years of retirement. This will allow you to keep more money invested until the market starts to rise again.
Conclusion
Investment volatility is one of the biggest risks facing retirees. A single bad year can have a significant impact on the quality of your retirement. However, some basic steps, like diversifying your portfolio and moving funds to more stable investments, can help reduce this risk.
Frequently Asked Questions (FAQs)
How long will my retirement savings last?
The duration of your retirement savings depends on how much you’ve saved and your withdrawal rate. If you follow the 4% rule and have a portfolio consisting of 50% stocks and 50% bonds, for example, your savings is likely to last for at least 30 years.
How much does the average American have in retirement savings?
The amount the average American has in retirement savings greatly depends on their age. The average American has about $95,600 saved, but Americans aged 60 to 69 have an average of $182,100, while Americans between the ages of 20 and 29 only have $10,500.
How can I maximize my retirement savings?
You can maximize your retirement savings by contributing as much money as possible to tax-advantaged accounts like your 401(k) and IRA. If your employer offers matching contributions to your 401(k), you should aim to get the full match.
How can I start withdrawing my retirement savings?
When you decide to start withdrawing your retirement savings, you can do so in several ways. You can regularly sell portions of your investments and withdraw cash. You may also take withdrawals from earnings and other payments you receive instead of choosing to reinvest them.
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