Retirement has been on your mind. You’ve been thinking about the right time to finally leave your job, and what the next chapter of your life will be like.
Not the best timing.
“The trade war definitely scares investors and has led to sharp declines in the stock market,” said Alicia Munnell, director of the Center for Retirement Research at Boston College.
Fortunately, there are ways to reduce your anxiety as China and the U.S. keep taking jabs at each other.
People planning to exit work in the near future should tone down their riskier investments, Munnell said, “so even a significant decline in the stock market would only have a modest impact on their portfolio.”
Fortunately, many people have their 401(k) savings in a target-date fund, which means their allocation automatically becomes more conservative as they get older.
Other people might have opted for a more hands-on approach. Either way, “investors who are getting close to retirement should use the latest bout of volatility as a wake-up call to check up on their portfolios’ equity exposures,” said Christine Benz, director of personal finance at Morningstar. (Munnell said she limits her equity holdings to a third of her retirement assets, to ride out booms and busts.)
Benz, for her part, recommends “boring old diversification.” That means a mix of stocks for long-term growth, bonds for income and protection from downturns and cash to meet short-term spending needs.
Moderation is key, experts say.
“Avoid the temptation to cash out your investments completely,” said Milo Benningfield, a certified financial planner and founding principal of Benningfield Financial Advisors in San Francisco. “You may have another two to four decades of spending to cover.”
And market gains strike fast and you need to be there to catch them. An investor who missed out on only the five best-performing days in the market would have ended up with a portfolio worth roughly 34% less than one that had been fully invested throughout the period, according to an analysis by Fidelity.
“Downturns are normal and usually short-lived,” said Melissa Ridolfi, vice president of retirement and college leadership at Fidelity.
The chart below shows how $10,000 invested in the S&P 500 Index, for the 20-year period of 1999 through 2018, would have performed under various scenarios.
Regardless of the Dow’s direction, working longer — if, of course, you can — is one of the best ways to ensure a financially comfortable retirement.
That’s because postponing retirement and your Social Security benefit by merely three to six months has the same impact on your retirement income as saving 1% of your salary a year for three decades, according to a study by the National Bureau of Economic Research.
The trade war could still be underway, but you’ll be more prepared for retirement.