In a perfect world, the stock market would always work in your favor.
The reality, however, is that dips are bound to happen and can be particularly problematic in your early retirement years.
For this reason, saving for retirement and planning for market downturns is essential, especially if you’re a homeowner and wondering if you should put your home up for sale.
When the stock market dips, retirees could be in a ‘danger zone’
Factors such as inflation, the political climate, and fears of a recession can all lead to stock market dips. A recent CNBC article described the impact of these downturns on retirees.
“Your first five years of retirement are the ‘danger zone’ for tapping accounts during a downturn,” as you’ll have less money for future growth when the market rebounds, Amy Arnott, a portfolio strategist with Morningstar Research Service, explains.
Arnott’s primary advice for those who hope to avoid this issue is diversification.
“Typically, you’ll keep one to two years of living expenses in cash, which would be accessible during market dips,” Arnott says. The next five years, you may use short- to intermediate-term bonds or bond funds.
From there, you can prioritize growth through stocks. As long as you plan accordingly and don’t put all your eggs in one basket, you’re less likely to outlive your savings.
Why retirees need to watch the market—and why they don’t
“Some retirees need to keep an eye on the market because pulling money out when it’s down can hurt their savings over time,” says Taylor Kovar, Certified Financial Planner and founder of 11 Financial. If these retirees were forced to sell investments at a lower value, they could lose more than if they had waited for the market to bounce back.
“For others, the market is not as big of a deal. If you have other income streams, like a pension, or if you don’t rely solely on your investments, you may not be as impacted by market dips,” explains Kovar. At the end of the day, it all depends on how much of your income is coming from that nest egg.
Also, for those thinking about downsizing, the market is essential.
“If the market is strong, you could sell your home for a good price and find something more affordable. But if the market is down, you might not get as much for your house, and finding the perfect smaller place could be tricky,” adds Kovar.
Since it’s always good to have a backup plan, Kovar suggests renting for a while, as this could be a safer option while the market settles.
How to protect your nest egg if you’re a retiree
While you can’t control the stock market, these tips can help you safeguard your retirement savings:
-
Diversify: “Having a mix helps protect you if one area takes a hit,” says Kovar. Look beyond stocks, bonds, and mutual funds, and consider alternative investments like real estate or even startups or precious metals. Annuities may also be worthwhile, especially if you like the idea of guaranteed returns. Get creative and think about the various retirement income sources at your disposal.
-
Build an emergency fund: “Keep enough savings to cover several months of expenses,” says Kovar. You never know when the extra funds will come in handy. This strategy can prevent you from having to sell investments when the market is down.
-
Cut your expenses: Take a close look at your expenses and figure out where you can cut back. Perhaps you have a gym membership you no longer use. Or maybe you can eat at home more often and save on dining out. “Less expenses will stretch your savings further and reduce the stress on your investments,” says Kovar.
-
Delay Social Security benefits: You can begin to collect Social Security at age 62. However, depending on your situation, it might be in your best interest to put this off for a few years so that you can increase your monthly benefits and offset the impact of inflation.
-
Consider a side gig or part-time work: Not only can an additional income stream give you some peace of mind during retirement, it may also provide opportunities for socialization and fun while improving your physical and mental health.
-
Reassess your housing situation: If your house no longer suits your needs, downsizing may make sense. It can potentially save you money and boost your retirement savings. Plus, it may reduce the need for home maintenance and repairs, which can become particularly costly in retirement.