For the average American who is saving for retirement the latest economic and stock market news associated with coronavirus sounds terrifying. The coronavirus pandemic disrupted our daily lives and affected our finances.
For those who are close to retirement, the financial news is the most frightening. You have been saving for retirement for decades and seeing all your savings going down brings havoc to your retirement plans.
How to protect your retirement savings is the most important question for many baby boomers.
When the stock market is volatile as right now it is hard to say how long this rough patch will last. For those who are 20 or 30 years away from retirement, this market downturn should not cause major concern.
Eventually, the market will bounce back, and you will have time to recover those losses. But if you are near retirement and your retirement savings took a major hit you may want to postpone your retirement plans.
According to the Market Rates survey:
- 36.4% of Americans within 20 years of retirement expect the corona crisis will delay their retirement.
- 37% of Americans aged 45 to 64 don’t know what their investments are doing in this environment.
- Of those who know where their investments stand, 43.8% of people in the 45 to 64-year-old age group reported losses of at least 10%.
For many baby boomers maybe, it is not the right time to retire now with the stock market being in free fall for many days. But it is a great time to review your plan and try to protect your retirement savings.
Adjust your retirement age and time you want to retire.
With the stock market down, unemployment high and the whole country in lockdown is hard to predict how soon our life will get back to normal. We do not know if the economy will recover fast or the country is heading toward a full-blown recession.
If you are 5 to 7 years away from retirement you still have time to protect your retirement savings by adjusting the time of your retirement. Unfortunately, you cannot change anything if you are already retired and watched your retirement savings shrunk.
However, if you are a few years away from retirement you should try to wait it out until the market is in better shape. This way you will have time to recover your losses and improve your retirement funds.
Do you know if you have enough saved for your retirement?
Look at your current savings and compare them with your financial goals. You maybe still able to retire on time if your savings are in good shape.
But what to do when you are behind on your savings or your savings have been hit hard? In this case, you maybe better off saving for a few more years and adjust the time when you can retire.
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Don’t cash out your 401(k) savings.
When the stock market is volatile, your first reaction is to protect your savings and pull all the money from retirement accounts. We all have that feeling when we watch the market being in free fall and expect the market will only get worse. We feel that it is the right thing to do by cashing out now before we lose any more money.
The truth is by cashing out now you can make a costly mistake. Because you cannot lose money until you sell your investments. When you sell your investment and the market is down, you will be locking in your losses.
The best thing you can do right now is to ride out the storm and wait for the stock market to calm down. As soon as the stock market starts to recover, your investments will rise in value as well. You will be happy to know that you are not missing out on all potential gains when the stock market starts to recover.
In addition to that, if you pull out money from your 401(k) and IRA accounts before age 59 ½, you will have to pay a 10 percent penalty fee and income taxes on the amount you withdraw.
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Review your portfolio and adjust for risk tolerance.
Right now, it is a good time to look at your portfolio and see if you need to adjust it for your age and risk tolerance. When you get older you should modify your portfolio. More money should be invested in conservative investments like bonds, treasury notes and cash investments with less money invested in stocks.
In order to protect your retirement savings, you need to diversify your investments. Usually, investments are diversified based on asset allocation, your age and risk tolerance.
I am sure that most people set up their portfolios a long time ago and enjoyed the healthy market long run of the last decade. But recently things have changed so fast that most of us did not have time to adjust our portfolios to the new stock market environment.
However, it is not late to make some adjustments and protect your savings from future market dips. Make sure that your investments are diversified properly going forward.
If you are in your 50s think about your risk tolerance. Then decide how to allocate any new money going into your investments.
If you are in your 60s you should allocate more of your money in safe investments going forward. This strategy will allow you to keep your investments as safe as possible if the stock market will continue to fall in the future.
For several weeks I have not had the stomach to look at our portfolio and see how much money we have lost. But from the last recession, I learned the importance of having cash reserves at all times. Since then we keep 5 percent of our retirement savings in cash. It helps me to sleep through the night knowing that if things go bad and we lose our jobs we have quick access to cash. We call it our spending bucket. It helps to know that we have a temporary source of cash to pay the bills.
I would recommend keeping part of your money stashed in cash if you are close to retirement. Theoretically, you should have enough cash to cover a year of bills or even more. It should help to survive through the market downturn when you are not working.
Your spending bucket should be invested in safe assets like money market funds or short-term bonds that are not subject to big price declines. Savings accounts and money market funds are considered as cash investments. These are called cash investments because they are as good as cash. You can withdraw them at any time without penalty fee.
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Don’t stop your 401(k) or IRA contributions
I think that many people drive themselves crazy checking 401(k) or IRA balance every day. It is hard not to do that knowing that the stock market is in bad shape due to coronavirus pandemic. In the current financial situation, it is tempting to cut back on your contributions because you want to protect your retirement savings. It is really easy to feel you are throwing good money after bad. None of these are good feelings.
But if you are able to keep your job it is smart to continue your contributions to 401(k) or IRA. Stay the course and when the market recovers, you will be glad that you did not miss the gain from that growth.
Some financial gurus even recommend boosting your retirement savings and contributions. Since the stock market is down you have an opportunity to buy quality investments at low prices.
On another hand, social distancing and lockdown measures make it hard for us to spend money on restaurants, concerts, sports events, or travels. When you are mostly confined to your home take that extra cash and add to your retirement savings.
If you are in your 50’s and planning to retire at full retirement age, you have 15 years or longer to contribute to your retirement funds. Time and compounding could still work for you over this time period. Therefore, keep saving and contributing money to your 401(k), IRA, and Roth IRA.
But if you are in your 60’s you have less time to recover your losses unless you want to postpone the time when you retire. Check out how much is your social security and decide if you can live off that paycheck before starts withdrawing money from retirement funds.
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Sometimes I feel that the entire world is in panic mode due to coronavirus spread. This health crisis has changed the way we live, work, and socialize. We put our lives on hold while watching the stock market crashed and our retirement savings shrunk.
However, I believe you can protect your retirement savings by adjusting your risk tolerance, asset allocation, and time of retirement. Continue contributing to your retirement funds as much as possible. By following these guidelines, you will be in a much better position to meet your retirement goals despite market conditions.
How do you protect your retirement savings during the coronavirus crisis? Share your thoughts with us in the comments below.
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Disclosure: This information is only educational. The intent if this post is to provide a simple guideline for an extremely complicated matter. I am not providing any specific financial advice or recommendations to any of my readers.
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