If you are retired or retiring soon, you know that financial decisions you make today will have a big effect on the life you’ll be able to have going forward.
Yet, the turbulence and confusion of the coronavirus pandemic can stir up emotions, making it harder than ever to see clearly.
Having a retirement plan and sticking to it is the way to weather moments like these.
If you don’t have a plan, now’s the time to create one so you can avoid acting on fear or impulse. Having a plan also should make you less susceptible to the following common mistakes, which otherwise can set your retirement back.
1. Failing to set aside cash to ride out market volatility
A good way to keep calm in a turbulent economy is to have several years’ worth of living expenses put aside outside the stock market. That way, market ups and downs will seem less personal.
Marketwatch columnist Howard Gold suggests keeping three years’ worth of cash or liquid assets to tide you over. Just don’t overdo it with the cash, since you’ll want most of your savings invested so the money can grow.
Do this instead: Fatten your cash cushion now, if you can, and start or beef up a separate emergency fund.
You may wonder where to put your cash reserves. When bond returns are low, Money Talks News founder Stacy Johnson says to consider buying certificates of deposit, short-term bond funds or short-term bonds.
“Think T-bills, two-year CDs or the Vanguard Short-Term Bond Index Fund,” Stacy says.
2. Selling stocks in a downturn
The impulse to sell stocks when prices are falling is understandable. “At least,” you may tell yourself, “selling now will limit the damage.”
But selling investments as they are losing value can wound your portfolio, leaving less money to grow when the market does turn around. Selling also means you’ll likely miss the chance to invest in bargain-priced stocks, stock funds and exchange traded funds in the downturn.
CNBC, citing research from J.P. Morgan, says:
“Data from the [Great Recession] also show that staying invested helped retirement accounts recover more quickly. For those who stayed the course, account values fully bounced back within three years, or by the end of 2010.”
Your plan may be to restore those lost savings later. But later may never come. And if it does, many people find it emotionally hard to buy back in as prices are rising. Trying to predict when the market will rise or fall is pretty much impossible for the average person to do.
Do this instead: Hold firm. Keep making at least the minimum retirement contributions required to get your employer’s match if that is an option for you.
3. Doubling down on cash and CDs
Another common panicky impulse is to put some or all of your retirement nest egg in a savings account or a CD as a safe haven.
Taking savings out of the stock market would mean losing the chance for the money to grow by more than it could in an insured saving account. Your cash buffer and emergency fund are better safety measures.
Do this instead: Consider Stacy’s go-to rule of thumb for deciding how much of your retirement savings to invest in the market:
- Subtract your age from 100 and put the resulting number in stocks. So, if you’re 65, keep 35% of your retirement savings invested in stocks.
- Put the rest in bonds and money market funds.
For more tips, check out “7 Ways to Retire — Even When the Economy Is Heading South.”
4. Living large while money’s tight
Your retirement savings typically must last for the rest of your life. When the impulse is to splurge, especially if you are newly retired, the safe move is to carefully inspect your current spending. Be clear-eyed about what you’ve got to live on and decide how to close any gap.
If you’re overspending, cut back your standard of living.
Withdraw conservatively from retirement funds. A 4% withdrawal rate — meaning withdrawing 4% of your retirement savings annually — is considered safe in normal times. Consider a lower rate during a downturn, to protect your investments.
Do this instead: When money is tight, see if you can generate more money from working part time or through passive income.
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