You have seen the news. COVID-19 is still taking its toll, as several states are closing bars and restaurants once again. You are right to be concerned about how a second wave could affect your retirement savings and what steps you need to take to protect your assets.
Your next move mainly depends on when you are heading into retirement. The general rule is not to invest the funds you need in the next five years. Between 2010 and 2019, you may have kicked yourself for following that rule and leaving investment earnings on the table. But current uncertain economic prospects warrant a conservative approach.
Image source: Getty Images.
If you are on your way to retiring soon
If you plan to retire within five years and have reached your specific savings goals, now is the time to consider withdrawing some of your riskiest investments. the S&P 500 The index, widely regarded as a proxy for the market as a whole, was only down 5% in the year in late June. That should mean that you can liquidate some of your positions without incurring large losses.
However, don’t sell your entire portfolio. At most, you could pay off the funds you expect to need before 2025. If you plan to retire in three years and your job outlook is fairly stable, for example, you could set aside two years of cash income. And remember to consider your Social Security benefit when calculating the income you need from your savings.
Leave that cash in a high yield savings account and you will earn approximately 1% to 1.5% on the balance. You may lose some gains with this approach, but another round of market volatility won’t eliminate it either. It is fair compensation.
If you haven’t saved enough
If retirement is just around the corner and you haven’t saved enough, you can benefit from a different approach. Instead of switching to cash, trade your higher risk positions for more stable stocks and equity funds. Doing so keeps you on the hunt for profit, but should reduce volatility.
His riskiest positions are small-cap funds, mid-cap funds, penny stocks, stocks he bought because he liked the company name, and international stocks. Reduce this in favor of established companies that have a history of paying dividends throughout all business cycles. In terms of stock market sectors, consumer staples, mass retailers selling consumer staples, health care, and utilities tend to be more resilient through recessions.
Even better, take a diversified approach and look for large-cap mutual funds and ETFs. Sustainable funds, also known as ESG funds, are another option, as they have performed well in recent recessions. Remember to choose funds with low expense ratios, as the expenses of a fund directly impact its returns.
Keep in mind that having more than 60% stock in your portfolio can be risky when you retire early. It will benefit if the economy recovers sooner rather than later, but will worsen if the recession continues. Don’t continue to hold a high percentage of stocks unless you have a backup plan or the flexibility to delay retirement if necessary.
If you are more than five years away from retirement
If you are more than five years from retirement, you have time to get through this recession and all its madness. The only adjustments you need to make are those that will prevent you from panicking in a market downturn. That could mean switching to higher quality stocks or increasing your bond holdings if you are overweight stocks.
You can use the Rule of 110 to assess the division between stocks and bonds in your portfolio. Just subtract your age from 110 and the result is the percentage of your portfolio that should be in stock. At age 40, for example, he would have 70% shares and 30% bonds. This composition strikes a reasonable balance between growth opportunity and volatility, given that retirement is over 20 years old.
Respect your schedule and risk tolerance
Ultimately, your retirement schedule and risk tolerance should guide the actions you take in your portfolio to protect yourself against a second wave. If retirement is near, or if you tend to panic in recessions, you can limit your exposure to value losses by increasing your cash or bond holdings.
However, those actions also limit their growth potential. The right move is the one that protects the funds you will need for years to come, while preserving some long-term growth opportunities.
