How the Stock Market Affects Your Retirement

How the Stock Market Affects Your Retirement

Retirees and those approaching retirement worry about volatility in the stock market. Big market drops can send a chill down the spine of those who depend on retirement savings invested in stock mutual funds, ETFs, and index funds. Market whiplash creates uncertainty about whether hard-earned and carefully saved money will be there when retirees need it. Learn how the stock market affects your retirement so you can prepare a strategy to soften the effect of market downturns.

Review Your Asset Allocation

In the simplest terms, the impact of the stock market on your retirement portfolio depends on what percentage of the portfolio is invested in stocks. However, the market has recently been defying the usual rule that when stocks go down, bonds go up. Extremely low-interest rates have affected bond prices. Bonds issued years ago with higher than the current interest rates have become more attractive and have risen in price, while newer bonds with lower interest rates are unattractive to income investors. However, stocks that pay dividends, distribute capital gains, and have the ongoing potential to rise in price provide a higher effective yield than most quality bonds in low-interest rate environments. In good times, stocks may provide greater returns, but they also carry a greater downside risk.

Asset allocation is the term that describes the portion of an investment portfolio invested in various types of financial instruments. People with years to go before retirement can be more aggressive investing in stocks, as their portfolios have more time to recover from market downturns. People nearing or entering retirement should consider rebalancing their portfolios to reduce exposure to stocks and increase investments in income-producing products.

Determine Sources of Income in Retirement

While social security benefits should provide some income in retirement, concerns still exist about whether social security will run out of money as the Boomer generation begins to draw heavily on the fund. This means retirees must think about other ways to supplement income. This can include working for longer, continuing to contribute to retirement accounts to save more, and delaying taking social security until the required age. Those nearing retirement can also consult a certified annuity advisor to discuss ways to provide a guaranteed minimum income in retirement that won’t be affected by market swings.

It’s important to remember, however, that as life expectancy rises, most people will need money in retirement for many more years than in the past. Therefore, people entering retirement shouldn’t abandon stocks entirely, as these investments can continue to grow over decades of retirement. Creating a strategy based on withdrawing a minimum amount necessary to support basic needs that can be adjusted up in good times and can revert to the minimum during downturns can smooth out the impact of the stock market on your retirement. Be sure to contact your financial advisor to devise a strategy to find the best asset allocation and withdrawal plan that accounts for your life expectancy and your lifestyle needs in retirement.

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