The US’s growing reliance on 401(k) plans and other fixed-contribution retirement accounts is a double-edged sword. On the one hand, because investors (rather than pension managers) decide how to invest in funds, they have more control over the funds needed in their later years.
However, once the careers of most investors are over, the days when they can rely on fixed-income pensions for a predictable income stream are gone. If the market turns in the wrong direction at the wrong time, it may mean losing years of hard-earned savings.
In terms of long-term investment, a certain degree of caution may be a virtue. Those who plan ahead before the next bear market is better able to absorb the impact of the market downturn and maintain their current lifestyle.
You can now take the following measures to protect your reserves from the inevitable fluctuations in the market.
- When the market becomes turbulent as retirement approaches, it may hinder years of diligent retirement plans and cause additional anxiety.
- As you age, your portfolio should shift to more conservative investments that can withstand the bear market, and the amount of cash on hand should increase.
- Even if you retire on the cusp of an economic recession, be diligent in making an exit plan and don’t let your emotions affect your judgment.
- If you withdraw your retirement fund early (before the age of 59½), you will be fined 10% and may owe taxes.
Maintain the right portfolio
The most important thing you can do to reduce risk is to diversify your investment portfolio. Some investors believe that depositing savings in mutual funds means that they are in good shape. Unfortunately, things are not that simple.
Every investor should adopt two main diversified investment methods. The first is asset allocation. This is the number of each asset class you own, whether it’s stocks, bonds, or cash equivalents, such as money market funds.
As a general rule, as you approach retirement, you want to reduce your exposure to riskier stocks (such as small-cap stocks). These securities tend to be more volatile than high-grade bonds or money market funds, so when the economy declines, they can put investors in a greater dilemma. Unlike young workers, older people simply don’t have enough time to wait for the stock market to recover when the stock market is hit.
This is why it is important to work with a financial advisor and determine the asset allocation that best suits your age and investment goals. Since asset classes will grow or fall at different rates over time, it is best to rebalance your account regularly to maintain a consistent distribution.
Suppose you have a portfolio of which 55% are stocks and 45% are bonds. Assuming that stocks performed well this year, they now account for 60% of your account due to these gains. Rebalancing means selling some stocks and buying enough bonds to maintain your overall risk profile.
Protect pensions from market fluctuations
“Owning a portfolio of bond funds can offset market volatility. At the same time, a sufficient number of equity funds can help maintain principal and offset inflation,” said Daniel Schutte, founder of Denver Schutte Financial.
Another type of diversification occurs in every asset class. If 50% of your investment portfolio is dedicated to stocks, look for a good balance between large-cap stocks and small-cap stocks, and between growth and value funds. Most advisers suggest that there is also some international fund exposure, partly because it can cushion the impact of the US recession.
Remember, not all bonds are created equal. For example, the debt of companies with lower credit ratings (called junk bonds) is more closely related to the performance of the stock market than high-grade bonds.Therefore, the latter is a better weight for the stocks in your account.
Carol Berger, CFP Chief Financial Officer of Berger Wealth Management of Peachtree, said: “Most people in the financial world are familiar with the asset class quilt, that is, an image with all colored boxes that shows the best performing asset class in a particular year. Good.” The city of Georgia. “It’s called a quilt for a reason. Different colors (asset classes) are scattered everywhere year after year. For example, emerging markets topped the list in 2007, in 2008, and returned to their peak in 2009.”
“In the past 10 to 15 years, many different asset classes have topped the list,” Berger added. “It can be said that because of the lack of a’model’, why would anyone try to predict which one will outperform the market? This is a way for me to explain the importance of diversity to my clients.”
The goal is to have an appropriate combination of assets that historically will not rise or fall at exactly the same time.
Some cash on hand
Those who have retired must maintain a delicate balance. To prevent obsolescence of assets, most financial planners recommend holding at least some stocks.
At the same time, retirees need to be more cautious about their investments because they do not have the long-term vision like young investors. To prevent a recession, some investment professionals recommend keeping cash or cash equivalents (such as short-term bonds, certificates of deposit, and Treasury bills) for up to five years.
“When you retire, most of your expenses should be relatively stable,” said Kirk Chisholm, wealth manager of the Lexington, Massachusetts Innovation Consulting Group. ”
If you are worried that inflation will increase and erode your purchasing power, please consider holding some “cash equivalents” in the form of Treasury Inflation Protected Securities or TIPS. Although the interest rate of these securities is fixed, the face value will increase with the consumer price index.Therefore, if the inflation rate reaches 4% per year, your investment will increase accordingly.
“If you can get a decent level of current income from TIPS, the inflation adjustment part can keep the purchasing power of the principal intact,” said Stephen J. Taddie, managing partner of CBE, CFM and Stellar Capital Management. . But remember, if you buy TIPS at a premium and we enter a period of deflation, then future inflation adjustments may be negative.
Disciplinary action for withdrawals
In short, the more funds you deposit, the better your position will be if there is a bear market. This may sound simple, but too many retirees overspend in retirement, causing them to make poor investment decisions out of despair.
The antidote is simple: use discipline in your spending habits. Most experts recommend withdrawing no more than 3% to 5% of funds in the first year of retirement to maintain a sustainable lifestyle. From there, you can adjust your annual withdrawals to keep up with inflation. Therefore, if you determine that you can withdraw $2,000 per month in the first year and consumer prices increase by 3% each year, your allocation will increase to $2,060 in the second year.
By planning your withdrawal allowance, you do not need to liquidate large amounts of assets at fire-sale prices in order to pay bills. “The mistakes of retirees usually come from withdrawing too much retirement assets too early and panicking when the market is in trouble,” said Patrick Traverse, the founder of MoneyCoach in Mt. Pleasant, South Carolina. “Make sure You have a solid plan and stick to it.”
If you are still saving for retirement, early withdrawals can be costly. If you are under 59½, eligible IRA and 401(k) account withdrawals are usually subject to a 10% penalty, and you may be required to pay taxes on all deferred contributions and gains.Therefore, if you withdraw US$100,000 in advance, you will face a fine of US$10,000 and a tax of US$25,000 to US$35,000, depending on your income tax class——This means that you may only get 60%~70% of what you think you want to withdraw.
However, in March 2020, Congress passed the Coronavirus Aid, Relief, and Economic Security (CARES) Act, which allows retirement savers to withdraw up to $100,000 from their accounts if they are affected by the COVID-19 pandemic No fines. The allocation must be made before the end of 2020. In addition, to minimize taxes, report these distributions as income that can be distributed within three years.
Don’t let emotions dominate
If there is a tendency to avoid when saving for retirement, it is impulse. When stocks plummet, it is easy to try to reduce losses by selling stocks. But in most cases, investors choose to act after the economic downturn begins.
When things get tough, you’d better stick to it to the end. If you regularly rebalance your reserves, you may actually buy more shares to control your distribution when the market drops. By buying at or near a low point, you can maximize your profits when the market finally rebounds.
When the economy is booming, maintaining stability is equally important. If you are still saving for retirement, resist the urge to cut expenses when your 401(k) exceeds expectations. The market will always go up and down. Those who were ahead of expectations before the bear market will always be easier to deal with the consequences.
John R. Frye, chief investment officer of Crane Asset Management in Beverly Hills, California, said: “Most people think that risk is the’how likely something bad may happen’. I disagree. The risk is The probability of accidents, accidents may also be good. This is a bell-shaped curve.”
“If you can survive the short-term effects of the economic downturn,” Fry added, “you have the ability to take risks, and you shouldn’t degenerate because you think you should pay a high price to hedge against risks. I have dozens of them in 2008. Retired customers who are still investing in (stocks) in a pleasant market as of 2009. They are very grateful for what they have done.”
By its very nature, the economy will always experience cycles of prosperity and depression. When the next bear market occurs, investors who take a disciplined approach and diversify their portfolios are almost always in a better position.