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An Unexpected Storm in the Financial Markets?
If a hurricane hit Wisconsin, we would all find it a shocking event. But if the same hurricane struck Florida, it wouldn’t really surprise us. Following similar logic, it shouldn’t come as a surprise when the stock market occasionally experiences an unexpected storm and declines in value.
Instead of making predictions whether the stock market will continue to go down or up, it’s better (and less stressful) to have a strategy in place that doesn’t require forecasting the future. If we know hurricanes are likely to occur near us, we should be prepared for when they happen!
Whether we’re currently in the middle of a financial hurricane now or just a major storm, there are a number of important steps to consider to minimize the long-term damage. First, recognize the reality of investing in stocks comes with the prospects of higher returns but it also entails the likelihood of years where prices will be lower. The fantasy that you can consistently move out of the market before it declines and buy back at the bottom is the siren call of investing.
Once you’re reality based around expectations, the next step is to prepare for the next serious decline in stock prices. Just like people need to set aside provisions before an unexpected storm hits (just try buying supplies after a hurricane), holding adequate amounts of money outside of stocks is important so you never have to sell stocks at depressed prices. This is where having a “rainy day” fund in savings as well as money outside of stocks (in safe bonds or CDs, for example) for any spending needs you may have in the next 5-10 years.
There’s no doubt that following this strategy will still inevitably result in your portfolio value declining but just because prices are lower today doesn’t mean you actually have to sell at those prices. Discipline and patience is the remedy to surviving the unexpected storm.
Sometimes I’ll hear that someone can’t afford to wait for stocks to recover (especially as someone approaches retirement or late life). In regards to a pending retirement, I agree having everything in stocks is usually not prudent but also remember you won’t be spending all your money the day after you retire. So once again, time is on your side assuming you have sufficient assets outside of stocks to wait for prices to recover.
While I don’t know if the stock market will decline further this month or this year, I do know that in most years, the stock market increases in value. Moving in and out of stocks only increases the chances you’ll miss the future appreciation. Creating a well thought out plan and sticking to it is the best protection.
While many employees concentrate on making selections related to insurance plans, it’s also time to consider your contributions to your 401K or other retirement savings accounts for the 2019 plan year. It’s also a great time to think about other ways you can ensure your retirement income will be adequate when the time comes to start drawing on it.
Since 2007, when the median retirement savings was only about $75,000, there has been a significant increase in the amount baby boomers are saving. That’s good news, considering that an estimated 39% of baby boomers expect their primary source of retirement income to be self-funded from 401Ks and similar retirement savings accounts. While the median amount of baby-boomer retirement savings is closer to $165,000 now, it still falls short of what will be needed to fully fund retirement that could be 20, 30 or even more years long.
In 2018 you can contribute up to $18,500 to your 401K plan and if you’re age 50 or older you can make a “catch-up” contribution of $6,000 more for a total of $24,500. In 2019 the contribution limit will increase to $19,000. While an increase in your monthly contribution might not be realistic for your financial situation, if you are able to give yourself this gift, it can help secure your later years and reduce your tax burden at present.
Many people may not be aware that the full retirement age (FRA) for Social Security benefits has been gradually increasing. FRA is now age 67. According to a Boston College study, 42% of men and 48% of women begin drawing benefits at the minimum allowable age of 62. This can significantly reduce your amount of benefit you receive.
You can defer Social Security benefits until age 70 and increase your monthly income about 8% per year for each year you defer. Unfortunately, many opt to begin receiving benefits early because they haven’t saved enough in other areas to fund their retirement. From its inception, Social Security was designed to supplement retirement income not serve as the primary source. Among Social Security beneficiaries, 50% of married couples and 71% of singles receive at least 50% of their retirement income from Social Security.
If you’re at or nearing retirement age, you may want to consider continuing some form of work. By continuing to work, even with reduced pay, hours, and stress, you’ll be able to have an additional retirement income source that, coupled with savings from 401K, pensions or other income, could allow you to defer your Social Security benefits thereby increasing the amount you’ll ultimately receive.
Consider giving yourself a gift toward your retirement income this holiday season. It is certainly one you’ll be grateful for in the future.
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