Are you concerned that your retirement savings won't last? You're certainly not alone. A 2013…
With the recent decline in the stock market to start 2016, both in the U.S. and overseas, many retirees and soon-to-be-retirees are understandably nervous. After all, in retirement you’re dependent on your savings, which means you’re dependent on the unpredictable vicissitudes of the markets. If your nest egg takes a serious hit, that often produces a lot of fear and worry. Here are some things you can consider doing to protect yourself.
1. Reduce your exposure to stocks with higher valuations. You can lower your risk by paring back on stocks that are overvalued. There are several simple ways to test whether a stock is overvalued. An overvalued stock is one that is ripe for a decline, especially in an overall bear market.
When the markets are overvalued as a whole, that is, trading above their average valuations, that is also a time to reduce your investments in equities. Past experience indicates that modifying your stock exposure based on valuations can improve the chances of your savings lasting through your retirement.
Withdrawing from your savings for several years while your savings balance is decreasing can put yourself at serious risk of outliving your money. This doesn’t mean getting out of stocks completely; if 60 percent of your savings is in stocks, you might lower it to 50% or 40%.
2. Ensure you can live off of the conservative portion of your savings. You will want to have an emergency fund of at least six months of living expenses anyway. But if the market downturn lasts several years, you’ll want to ensure you can draw from bonds and savings accounts, instead of having to withdraw from your stock savings at the same time they are declining. This may require you to cut back on your spending for a while.
3. Review your budget. If you have to rein in your spending to weather a market downturn, you’ll want to go back to your expense plan and look for ways to pare back your expenses. Also, you might lower the rate at which you increase your annual withdrawals from savings to keep up with inflation. If you forego increasing your withdrawal rate for a year or two, this can increase the longevity of your savings.
4. Emphasize income-producing investments. To help ensure you can meet your monthly expenses, you’ll want to shift your investments to those that generate regular income. Even when the stock market tanks, these will continue to produce regular payments. Some examples are bonds, rental property, and annuities. Remember that some bonds also carry default risk, and you should investigate the solvency of the organization underwriting the bond before purchasing. Also keep in mind that bond funds are very sensitive to prevailing interest rates; when interest rates begin to rise, bond funds will lose some of their value.
Another alternative is dividend-paying stocks. Focus on stocks such as “Dividend Aristocrats”, which have a long history of annual dividend increases. These are established companies with strong businesses and a strong motivation to keep raising their dividends, no matter what the overall market is doing.
5. Look for other ways to produce income. Many retirees continue to work in retirement, both for the income and to remain productive. There are many options for retirees now, such as traditional part-time jobs, consulting, online businesses, and more.
6. Protect your health. Healthcare is one of the largest expenses for retirees. Staying healthy through a proper diet and regular exercise has a financial payoff in lower costs for prescriptions and treatment and insurance premiums.
7. Keep a proper perspective. Common thinking is that retirees are more vulnerable to market crashes because they don’t have as much time to recover as younger people. But if you’re starting a retirement at age 65, your retirement is likely to last at least 20 years. You won’t need all of your savings immediately; you only need enough right away to live on. The rest you will keep in reserve for future needs.
That’s why most financial advisors suggest retirees keep a substantial portion of their savings in stocks. The average bear market lasts 19 months, according to the Leuthold Group, a financial research firm. The market goes in cycles and historically has declined every ten years or so. So while it’s never fun to live through a market downturn, it isn’t a reason to panic.