With the current covid situation affecting the stock market causing a dramatic increase in the stock market volatility and negatively affecting all business sectors, retirees or soon-to-be retirees naturally worry about their retirement fund. Unfortunately, the pandemic is not the first or the last situation that can put cracks on your nest egg, and there will be more conditions that may prop up in the future. While uncertainty is part of life, your retirement fund doesn’t need to suffer from it. Figuring out how to protect your retirement savings is not impossible with the following strategies.
Invest in Annuity
Don’t spend your retirement savings, instead invest them in income generators that can generate monthly income for you for the rest of your life. Invest a portion of your savings in an annuity from an insurance company that will later on give you a fixed monthly income. An annuity is a contract that you purchase from your insurance company where your payments (contributions) are converted into monthly payments for the rest of your life.
There are several types of annuities that you can choose from. You can choose to purchase an immediate annuity, one that’s fixed in dollar amounts, a variable annuity that’s adjusted depending on the state of a portfolio of stocks, or an annuity that starts paying out at a later age. These are just some annuities that you can buy. You can talk to your trusted insurance broker for more information, or if you prefer to search for annuities in the comfort of your house, you can opt to buy annuities online.
Diversify Your Portfolio
There is an adage that goes, don’t put your eggs in one basket, and this holds especially with your stock portfolio. There are two ways to diversify your portfolio -asset allocation and diversification within the asset category. The first one is asset allocation- the amount of each asset class you own as bonds, stocks, or money market funds. As you get older, you ideally want to steer away from exposure from a riskier investment like small-cap stocks (stocks from companies that have small market capitalization). These stocks are more volatile and can put a big hole in your portfolio when the market drops.
The second one is diversification within the asset category. For example, if you’ve dedicated a portion of your portfolio to stocks, ensure that you have a good balance between large-cap and small-cap stocks and between value and growth funds. You might also want to look into putting a mix of international stocks because they can cushion the blow just in case of a U.S. economic slump.
Spend Only Investment Income
When you’ve invested your savings- either all or part in a diversified portfolio of stocks, mutual funds, bonds, bank accounts, etc., and you’re getting investment earnings as interests and dividends- spend only the investment earnings. Try not to touch the principal.
You can use the income generated from your investments to cover your entertainment, travel, and other “wants.” Of course, hopefully, you can reduce these expenses when the stock market becomes volatile.
Have Cash on Hand
So you already have annuities and a solid, diversified portfolio. But as an additional safeguard against market crashes and economic slumps, experts suggest keeping at least five years’ worth of expenditures in cash or cash equivalents like certificates of deposit, short-term bonds, and Treasury bills.
Usually, when you retire, most of your expenses are reasonably predictable, but a significant expense can come along occasionally. Unlike when you were working, you can’t compensate for the additional expenditure by working more hours, so you’ll have to dip into your savings to cover it. It’s not ideal for taking money out of your investments, especially when they are not performing well. Ensure you have enough liquidity for these unexpected situations because cash is still king.
Keep Your Emotions in Check
The more money you save, the better you’ll be able to withstand an economic storm or a volatile market. This advice is simple enough and easy to follow. But a lot of retirees overspend their savings leading to poor emotional investment choices.
The solution to this is simple – control yourself and be disciplined in your spending habits. Make a computation on how much you can spend with the money you have coming every month, and cut back on your ‘wants’ when your budget doesn’t allow you. If you are using your retirement savings, experts suggest withdrawing only 3% to 5% of your funds in a year. From this account, you can adjust your annual withdrawal to follow the inflation.
Retirement is a fantastic time in your life where you can finally enjoy all the benefits of years of hard work. Protecting your nest egg early on so it can weather any market volatility ensures that you are financially secure in your retirement years.