Returns over the next few years will likely be lower than where they have been historically. Such market setbacks can be a major hiccup for your retirement strategy.
Should individuals increase their savings rates to compensate? Or look for higher returns in other assets? For the most part, if you are under 50 years old you should not make any changes. Your current retirement strategy should remain in place — and this should include saving 15% of your income.
What Should Your Retirement Strategy Look Like?
Oftentimes, individuals who are under 50 years old and still building their retirement funds should stay the course, regardless of the current market. Investors under 50 still have enough time for their retirement savings to recover from a short-term decline in returns.
Individuals older than 50 have a shorter time horizon before retiring and may need to adjust their retirement strategy. These adjustments may include increasing their savings rate, delaying retirement for a year or two, or taking on part-time work during retirement.
Create a Retirement Strategy to Weather Market Turmoil
If you’re off course with your retirement savings or feel the current market turmoil is here to stay for an extended period, then it’s time to adjust your retirement strategy. There are three key things you can do to weather current and future market setbacks.
Rethink Your Spending
Start by rethinking your spending plans during retirement. A retirement strategy that survives retirement is not complete without a well-considered spending plan.
If market setbacks threaten to derail your retirement, consider revising your spending plans during retirement downward. A 4% withdrawal rate should be safe enough for most retirement strategies.
But don’t forget the benefits of Social Security, where the payments increase with inflation. This monthly income can be a key cash inflow that will ease the pressure of market pullbacks.
Keep Cash Reserves
When preparing to weather market setbacks, make having cash reserves a staple in your retirement strategy. Enough cash reserves can serve as an emergency fund that will carry through grueling market conditions.
If you have cash reserves that cover one to two years of spending then you will be able to manage any unexpected expenses without having to dig into your retirement. This is also where having an alternative source of income — such as Social Security — comes into play.
Having cash reserves and another income source will allow you to withstand a down market. But make sure to keep your cash stash in a relatively safe place, such as short-term bond funds or money market accounts.
Adjust Your Asset Allocation
It gets easier to survive market setbacks if you adjust your asset allocation over time. A retirement strategy that embraces bonds or fixed income as you get older will help mitigate market ups and downs.
Additionally, in high periods of inflation, some assets perform better than others, such as higher-yielding bonds and Treasury Inflation-Protected Securities (TIPS).
Safeguard Against the Future
How different will your life look when you don’t have to worry about your retirement, no matter what the market has in store? If you’re looking for professional experience in navigating the current market and future setbacks, just give us a call.
Source article: https://www.troweprice.com/personal-investing/resources/insights/market-setbacks-do-not-need-to-set-back-your-retirement-plans.html
Disclosure: You should always consult a financial, tax, or legal professional familiar with your unique circumstances before making any financial decisions. This material is intended for educational purposes only. Nothing in this material constitutes a solicitation for the sale or purchase of any securities. Any mentioned rates of return are historical or hypothetical in nature and are not a guarantee of future returns. Past performance does not guarantee future performance. Future returns may be lower or higher. Investments involve risk. Investment values will fluctuate with market conditions, and security positions, when sold, may be worth less or more than their original cost.
