4 Ways to Protect Your Retirement Plan from Almost Anything

You rely on your retirement plan find to be there to help you enjoy the benefits of working hard all your life. You’ve been smart about your investments and feel pretty secure with the possibilities of your retirement fund being there when you need it. However, dips and highs in the stock market can make even the savviest of investors can get jittery.

Below are some tips to help protect your retirement funds no matter what the stock market does.

1. Figure Out Your Allocations

The first thing to do is to figure out how much of your retirement savings is divided up between bonds, cash and stocks. It’s this asset allocation that will be the largest determinate if and/or when the stock market falls.

Be sure that you don’t simply guess your asset mix is currently — even if you knew what it was in the past. Your portfolio could be more heavily skewed toward stocks than you realized, especially if you haven’t made it a point to rebalance it on a regular basis.

Comb through each of your holdings on an individual basis and determine how much is invested in cash, bonds and stocks. Use those figures to work out the percentage of each that falls into the three categories.

2. Look to the Past

No one can accurately predict when the next stock market downturn will materialize. Suffice it to say, though, that as positive as the market is as of this writing, it will eventually go down. How far that decline is and how rapidly it happens is up to conjecture.

Looking at the recent financial crisis that the United States just endured, the figures show that stocks declined about 55 percent between October 2007 through March 2009. During that same period of time, though, the broad bond market showed a gain of about 7.5 percent.

If you have the typical asset allocation for someone who’s retiring in about 20 years, you’ll have about 20 percent in bonds and the rest in stocks. If the stock market has a decline that’s similar to the one noted above, the value of your retirement portfolio could fall by about 40 percent. A conservative mix of 50 percent in each would mean that you’d take a hit of about 25 percent of your funds’ value instead.

These figures are rough estimates but provide you with the amount that you could stand to lose if the market tanked again.

3. Setbacks and Your Plans

The purpose of the above exercise was to give you a percentage that you might lose should the stock market dip substantially. You can easily determine how such a setback might affect your retirement plan by using a retirement income calculator. T. Rowe Price, Vanguard and Bankrate all have good options that are straightforward while offering you lots of information.

Simply input your information and the calculator will return an estimate of whether you’ll be able to retire on schedule. It’s important that you substitute current value of your retirement fund with your estimation of its value after the market declines. Doing so will give you a clearer picture of how much such a decline will affect your ability to retire when you planned as well as how much less you’ll have when you do retire.

4. Make Your Move — Or Not

If you make a move based on this newfound information will likely hinge on how close you are to actually retiring. Retirement that is decades away doesn’t warrant a more conservative shift in your portfolio because you’ll likely reduce its potential for long-term growth. A better strategy would be to save more and not rely on market gains to beef up your retirement funds.

If retirement plans are in your near future, this exercise can help you figure out how much a slump in the stock market could affect your annual retirement income. Use one of the tools noted above to estimate a withdrawal rate based on both your fund’s current value and its projected value. If there’s a shortfall, move some of your stocks to more conservative options now.

While the above tips won’t guarantee that you’ll retire rich, they can help you save more of your hard-earned money. Just be sure to rebalance your portfolio on a regular basis.


Ethan Warrick
Wealth Authority

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