воскресенье, 6 ноября 2016 г.

Tips for Retiring in a Bear Market

Tips for Retiring in a Bear Market

Tips for Retiring in a Bear Market

Accumulating a sufficient retirement nest egg takes a lot of planning and discipline over the course of many years. Ongoing contributions to your 401(k) or other defined contribution retirement plans, utilizing individual retirement accounts (IRAs) and making sure that this money is properly invested are key elements of a solid retirement planning strategy.

Financial advisors suggest that retirement savers control what they can and not worry about the markets and other factors beyond their control. One of those factors is the timing of retirement. Retiring in the face a bear market for stocks can have quite a negative impact on your nest egg and the amount of cash flow you might enjoy during retirement. Retirees simply have far less time for their portfolios to recover from the impact than do younger investors. (For more, see: Retirement Planning: Introduction.)

Use a Bucket Approach

One of the ways to combat the temptation to abandon your investment allocation when things get tough in the markets is to set up investment buckets with retirement funds. Noted financial planner Harold Evensky pioneered this approach and Morningstar Inc.'s (MORN) Christine Benz has written extensively on the topic.

Bucket one will consist largely of cash or cash-like investments that won’t be impacted in a down stock market. This bucket might include anywhere from one to three years of annual retirement living expenses, generally with at least one year in cash. Annual payments from Social Security or a pension can be used to reduce the size of this bucket. (For more, see: A Sanity-Saving Retirement Stock Portfolio.)

Bucket two will hold five or more years of anticipated living expenses and will be invested for income and relative stability. This bucket might consist of dividend-paying stocks, high quality fixed income and similar types of investments.

Bucket three will hold the rest of the retiree’s portfolio and is geared for the longer term. This bucket will hold stocks and other investments geared for long-term growth and will be aimed at keeping ahead of inflation. (For more, see: Tips for Managing Inflation in Retirement.)

Pre-Retirement Planning

Once you are within 10 years or less of retirement it is important to get your retirement ducks in a row. A financial advisor who understands retirement planning and the math behind it can be a real asset at this point. It is vital to run the numbers every year or at this point in time to make sure you are on track no matter what the stock market might do. If you find that the numbers are not working out you may still have time to make some adjustments prior to retirement, including delaying your retirement by a few years if needed.

Prepare a retirement budget. It is important that you have a handle on your anticipated expenses heading into retirement. Which expenses will be fixed and which ones will be variable? The latter might be a place you can cut should a bear market happen early on during your retirement. (For more, see: Closing in on Retirement? Read These Tips.)

Most important is to create a plan that includes a sound investment plan and a withdrawal strategy that is reasonable and sustainable. Financial advisors need to work with clients to help them design strategies that are consistent with their risk tolerance and that are likely to support their cash flow needs. The biggest risk to a comfortable retirement is the risk of outliving one’s money. The retirees who were generally hurt the worst during the 2008-2009 downturn were those who panicked and sold out at the bottom of the market.

The Bottom Line

Retirees have no control over the economy and the financial markets at the time of their retirement. The best strategy to deal with a bear market early on in retirement is to have a plan that is as all-weather as possible. (For more, see: Protect Retirement Money from Market Volatility.)

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