It’s only natural that older workers and retirees would be anxious about the recent stock market volatility.
Older workers might not be able to make up for losses in their investments before they retire. Both older workers and retirees might also think they don’t have much time to ride out future stock market declines.
If you retire in your 60s, it’s entirely possible you, or your spouse or partner, might be retired for 20 to 30 years or more. In this case, it’s inevitable that there will be a few more stock market crashes during that time. History backs up this claim: During the 30-year period from 1987 to 2017, we experienced four major stock market crashes, each one of which could have derailed a carefully developed retirement plan. Knowing this, it’s critical that you create a plan that will help you survive this market volatility.
The trouble is, nobody can reliably predict when the market will crash — or when it will recover. As a result, you’ll want to develop a strategy to protect yourself when the market crashes, even without knowing exactly when that might happen.
The worst thing you can do during a stock market crash is panic and sell your stocks near the market bottom. This will only lock in your losses and prevent you from enjoying appreciation in your assets when the market recovers.
To address these concerns and be able sleep at night even when the stock market drops, older workers and retirees can develop a portfolio of retirement income that’s appropriate for retirement in the 21st century. You’ll want to shift your thinking from building a diversified portfolio of retirement assets (which you did while you were working) to designing a diversified portfolio of retirement income that will last the rest of your life no matter how long you live.
While you’re working, you might devote a portion of your retirement assets to “safe” investments, such as bonds or savings accounts, that won’t drop substantially due to a stock market crash. In retirement, the “safe” part of your retirement income portfolio consists of “retirement paychecks” that deliver a monthly retirement income that lasts the rest of your life and won’t drop if the stock market declines. Examples of these retirement paychecks include Social Security, pensions, annuities, and bond ladders.
Your goal is to try to cover your basic living expenses with these retirement paychecks, or at least come close. Examples of such living expenses include housing, food, utilities, and medical premiums. When the market crashes, with these retirement paychecks in place, at least you can feel safe that you won’t have to move in with your kids.
Once you’ve secured your guaranteed retirement paychecks, then you can invest the rest of your savings for growth potential, just like you did while you were working. The growth part of your retirement income portfolio consists of “retirement bonuses” that cover discretionary living expenses, such as travel, hobbies, and spoiling your grandkids. Implement a strategy to make systematic withdrawals from these invested assets that will last the rest of your life. A best practice with such a systematic withdrawal plan would periodically decrease the withdrawal amount if the market drops, or increase the amount if you’ve experienced gains. The idea is that you could reduce these discretionary living expenses if your retirement bonuses decrease due to a stock market decline.
For the assets that generate your retirement bonuses, you can invest them substantially in the stock market, for the potential to grow your savings and increase the amount of your future retirement bonuses.
The third part of your retirement income portfolio is an emergency fund that would cover any unexpected expenses, such as house repairs, or deductibles and copayments for medical expenses. By having an emergency fund, you won’t be forced to dip into the assets that are generating your retirement paychecks and bonuses.
There are many details to address when planning your 21st century retirement income portfolio. But it’s part of your new “retirement job” to plan for the significant challenges we face by living a long time in retirement.
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