Investing in the stock market is an important part of any long-term investment strategy, but during retirement, the roller coaster ride that is today’s market can be a little difficult to stomach. While risk tolerance is a personal thing, everyone needs to recognize the two important changes during retirement that affect your ability to earn returns.
One: You stop adding money to your retirement accounts.
Two: You begin taking money out of your retirement accounts.
These two things matter regardless of your risk appetite, because they are connected to the one thing every investor must have in order to invest successfully in the stock market: TIME.
The average retiree has less time than the average investor who is in their 30s or 40s. Having less time means you aren’t able to capitalize on the best that the market has to offer – long-term strategies such as dollar cost averaging – without making a few adjustments first.
BUT – that doesn’t mean you don’t have any time. Today’s retirees are living longer than any generation before them, which means having a long-term investing strategy is a necessary part of any retirement plan. Here are three steps you can take today to ensure your market investments don’t send you screaming to the poor house.
STEP ONE: CHANGE YOUR STRATEGY
Dollar cost averaging is an effective investment strategy whereby you invest the same number of dollars regardless if the market is high or low. If you buy when stock prices are low, you continue to invest so that when stock prices go high, you effectively make a profit.
When the market falls during retirement, however, you are no longer buying those stocks when they are cheap, because you are no longer adding money to your portfolio. Furthermore, you’re also taking money out of your investments. This means when the market takes a loss, you also take a loss – twice.
One way to avoid taking this double-hit is to change your investment strategy from one of accumulation to preservation. Instead of keeping all your money in the market in growth-mode, move a portion of your funds to a safer place where the principal is protected.
STEP TWO: SECURE YOUR INCOME
You can work with a financial professional to devise an income plan if you are unsure about how much money you need to maintain your lifestyle during retirement. Generally speaking, most retirees find they require 70 to 80 percent of their current income in order to maintain their lifestyle during retirement.
Many investors rely on annuities to structure their retirement income because they offer the kind of principal guarantees that market investments do not. For example, during the market downturn of 2008, many retirees lost as much as 40 percent of their portfolios and, that affected how they spent their money. Investors who had the money they needed for income secured inside an annuity, however, still received their income and were able to maintain their lifestyle.
STEP THREE: ESTABLISH AN EMERGENCY FUND
Everyone needs to have some sort of emergency saving fund, but retirees especially need to have access to cash. Your reasons for needing the cash could be happy or sad, but regardless of why, you don’t want to have bad timing.
If all your money is sitting in market investments and your daughter is getting married, imagine what would happen if the market took a hit and you had to sell at a loss just to take out your money.
Our stock markets are currently in a global economy where news from overseas can send the market plunging inside a single day. You don’t have to leave yourself vulnerable during retirement. Take these three steps to ensure your ride through retirement is a smooth one.
Have questions about the allocation of your retirement portfolio? We’re here to help.