One day you appear to be on track for retirement, and the next day the stock market crashes. You were on track for a comfortable retirement at age 67 – or before, with a little luck. Now you may have to work into your 70s before you can afford to retire.
Don't let this happen to you. You can't stop the market from crashing, but you can limit the damage by following these five steps.
1. Make Conservative Estimates – Proper retirement planning centers on a budget and reasonable estimates of income and expenses. Estimate your retirement living expenses. Find out your estimated Social Security benefits by signing up for a My Social Security account with the Social Security administration. The difference between costs and Social Security benefits is the gap you must fill with retirement savings.
Once you have income and expenses estimated, pad those estimates. Raise your assumed expenses by 5% - 10% and cut your income estimates by the same amount, and then recalculate your required nest egg. By setting conservative goals, you establish a cushion that can buffer the effect of a crash.
2. Manage Your Stocks/Bonds Ratio – In the early years, it's best to keep a larger portion of your portfolio in higher return/higher risk stocks. You can recover from a crash then. Consequences are more severe as you approach retirement.
As you age, shift your portfolio toward bonds, cash, or other lower risk/lower return investments to limit the effect of a downturn. The percentage should be based on your overall tolerance for risk and whether your nest egg is sufficient or questionable.
3. Keep Debt Low – It's hard to manage cash flow through a downturn when you have significant debt – especially high-interest credit card debt. As a rule, try not to charge any more on credit cards than you can afford to pay at the end of the month – and if you do carry a balance, pay off the balance as soon as possible.
4. Have an Income Plan B – Think about other sources of income that could be used in case of emergency. Do you have assets that you could sell or tap, such as a reverse mortgage on your home? Do you have skills that could be translated into a part-time job or consulting gig?
5. Review Your Expenses – As with your income, think of which retirement expenses could be cut back with the least pain. Maybe you can't meet all your retirement goals but focus on the ones that are the most important to you. We suggest making several levels of contingency plan – consider nest egg losses of 10%, 25%, and 50%.
If the market does crash during retirement or as you enter it, don't panic. The market always recovers and eventually surpasses its previous mark. By shifting all your money to low-risk investments – or pulling out of the market entirely – you'll miss out on the recovery and settle for a smaller total retirement fund.
Once the market bottoms out, shift your portfolio a bit more toward stocks – within your tolerance for risk, which may be shaky after losing a large chunk of your retirement funds. If you're already retired, shift your monthly withdrawals down for a bit and cut your expenses to match.
Within a few years, you can return to your normal withdrawal rates and restore your original retirement plans. You can say that you rode out the economic storm better than most – because you planned well and skillfully executed your plan.
Let the free Retirement Planner by MoneyTips help you calculate when you can retire without jeopardizing your lifestyle.