Worried about retiring during a market crash? Here’s what you need to know

SmartAsset: Worried about retiring during a market crash?  Here's what you need to know

SmartAsset: Worried about retiring during a market crash? Here’s what you need to know

Because bonds and stocks are sold side by side, retirees may have reasons to fear that their well-diversified portfolio may not prove sufficient to retire. Fixed-income investments are experiencing one of the worst years in decades, and stocks have fallen nearly 17% year-over-year. According to investment research firm Morningstar, the 60/40 portfolio is performing the worst in 90 years. However, history suggests that recent retirees need not panic. Taking steps to protect your assets during a market downturn can relieve some of the stress and keep your home eggs a little safer. Here’s what you can do.

A financial advisor can help you plan for retirement and select investments that align with your financial goals. Talk to a qualified advisor today.

Historically, you shouldn’t panic if the market crashes

Research firm Morningstar says all retirees should be aware of the order of return risk, as it can ruin your retirement plans. Sequence risk is the risk that will have a negative effect on the overall rate of return of a portfolio during retirement.

When you have a long horizon for your investment, such as when you are contributing to a retirement portfolio, the results of your portfolio ultimately determine the long-term average return. But when you get close and retire, start lifting portfolios, the value of your portfolio reflects market performance and cash outflows. The combination of an increased market crash with withdrawals can very negatively affect the outlook for a leisure portfolio.

SmartAsset: Worried about retiring during a market crash?  Here's what you need to know

SmartAsset: Worried about retiring during a market crash? Here’s what you need to know

Nevertheless, history has shown that most well-diversified portfolios can and do recover over time. Morningstar data indicate that during the market crash of 1929 – the worst in history – retirees with a 60/40 portfolio did not recover until 1945. The initial market downturn affected those portfolios less than their equity-heavy counterparts as bond performance helped return up shore. The worst happened in 1931, when the Federal Reserve raised interest rates, and by 1932, the value of an investor in the 60/40 portfolio had dropped by almost half, including 100,000.

Other historical market crashes also show the potential for gradual risk, or lots of negative returns year after year. In the 1973 beer market, 60/40 investors saw their portfolio prices fall by 30% by the end of 1974. Nevertheless, despite the ongoing high inflation rate, reaching 12.3% in 1974, the value of the portfolio finally recovered by 1982.

Another long recovery came after the 2000 crash when the dot com bubble burst. Not only did the stock market collapse for three years in a row, but shortly thereafter, the 2008 financial crisis exacerbated the devastation. As a result, portfolios were not recovered until 2013.

What retirees can do

While the situation may seem dire due to the long recovery horizon, there are multiple ways to protect against resource depletion. For example, investors can avoid selling assets in a low market by keeping the planned withdrawal value for one to two years in cash. Globally, high-net-worth individuals often hold 21-28% of their assets in cash or cash equivalents, a percentage of which tends toward the upper end of the range during market crises. This opens up better buying opportunities when the market eventually improves.

Being flexible with the withdrawal rate is also the key to reducing order risk. Morningstar analysts recommend either withdrawing a certain percentage of your portfolio value each year, adjusting your withdrawal rate for inflation (i.e. not increasing your withdrawal percentage if inflation is high) or using a so-called gardrail method where you can reduce your withdrawal rate. A set exceeds the threshold.

The last row

SmartAsset: Worried about retiring during a market crash?  Here's what you need to know

SmartAsset: Worried about retiring during a market crash? Here’s what you need to know

The investment research firm Morningstar warns against the power of risk, which could significantly affect retirees and their long-term retirement outlook. Historical records indicate that large stock market crashes removed double-digit values ​​from investment portfolios and took about 10 years to recover. However, 60/40 retirees can protect their investment from such risks by keeping a certain amount of assets in cash and adjusting the withdrawal rate as needed.

Retirement planning tips

  • Not sure if you have enough savings for retirement? For a solid, long-term financial plan, consider talking to a qualified financial advisor. Finding a qualified financial advisor should not be difficult. SmartAsset’s free tool lets you match up to three financial advisors who provide services in your area and you can interview your advisor at no cost to determine which one is right for you. If you are ready to find a mentor who can help you achieve your financial goals, get started now.

  • Use SmartAsset’s free leisure calculator to get a good first estimate of how much your retirement costs will be.

Photo Credit: © iStock.com / Keith Lance, © iStock.com / Carlos Pascual, © iStock.com / Cecilie_Arcurs

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