Introduction

As retirement nears, market swings pose a major threat to your financial stability. You've worked hard to save, and you don't want sudden market drops to put your future at risk. It's crucial to know how to handle this danger to protect your savings and keep your retirement plans on track.

Let's explore why market ups and downs worry retirees, what can go wrong if not managed well, and most importantly, how to reduce these risks.

What Are Market Swings, and Why Should You Worry?

Market swings refer to the frequent changes in financial markets. You've likely heard this term on the news when stock prices move sharply. While this may not have bothered you much while working—since you had time to recover—things change a lot as retirement gets closer.

When you depend on your investments for retirement income, market swings can be a big risk. A sharp drop in stocks can lower your portfolio's value, possibly forcing you to sell investments at a loss just to cover your living costs. This is where the sequence of returns risk comes in. If you face negative market returns early in retirement and start taking money out, you could greatly reduce what's left for future years, increasing the chance of running out of money.

What Might Happen If You Don't Plan for Market Swings?

Picture this: You've just retired, and most of your money is in stocks. You feel good because the market has been doing well lately. But then, out of nowhere, the market falls. Stocks drop 20%, 30%, or even more. Now you face a tough choice: Do you sell your investments at a loss to pay for your expenses, or do you wait and hope the market bounces back?

If you sell, you lock in those losses, permanently reducing your portfolio's value. If you hold on and keep taking money from your investments, you could further drain your savings. Either way, market swings have put your retirement at risk.

This exact situation happened to many retirees during the 2008 financial crisis and again during the COVID-19 pandemic. Those without a plan to manage market swings had to make hard choices that affected their financial future.

How to Lower the Risks of Market Swings

The good news is that you can take steps to shield your retirement savings from market swings. Here are some key strategies to think about:

1. Spread Out Your Investments

Spreading your investments across different types of assets is a powerful way to lower risk in your portfolio. By putting your money into various things like stocks, bonds, and real estate, you reduce how much any one part of the market can affect your overall savings. If stocks go down, bonds or other assets might stay steady or even go up, helping to soften the blow.

A well-spread portfolio also includes investments in different countries, not just your own. This way, you're not too exposed to the risks of any single country's economy.

2. Mix Growth and Income

A strong retirement portfolio should have both investments that can grow over time and ones that provide regular income. Growth investments, like stocks, offer the chance for long-term increase in value, which helps fight inflation. On the other hand, income-producing assets, such as bonds or stocks that pay dividends, give you steady cash flow. This can reduce the need to sell investments when markets are down.

Having a mix of both creates a balance between long-term growth and short-term income stability. This approach gives you flexibility to handle market ups and downs without putting your financial security at risk.

3. Keep Some Cash on Hand

Having some cash set aside can help you feel more secure during shaky times. By keeping part of your savings in cash or other easy-to-access assets, you can cover your living costs for a year or two without having to sell your investments. This allows your portfolio time to recover if the market takes a temporary dip.

Think of this cash as an emergency fund specifically for dealing with market ups and downs. It gives you time and prevents you from making rushed decisions based on short-term market changes.

4. Follow Your Plan

Market swings can be scary, especially when you see your retirement savings suddenly drop in value. But one of the worst things you can do is panic. Selling your investments when the market is down can lock in losses that might have been temporary. Instead, it's important to stay calm and stick to your long-term financial plan.

Working with a financial advisor can help you keep perspective and avoid making emotional choices during rocky market times. A good advisor will help you adjust your plan as needed while keeping your long-term goals in mind.

Case Study: How I Helped a Client Navigate Market Volatility

I once worked with a client, let’s call him John, who retired right before a major market correction. John had a significant portion of his portfolio in stocks and was understandably nervous when the market dropped sharply. He was worried that his retirement was in jeopardy and considered selling off a large portion of his stocks to avoid further losses.

Rather than making a rash decision, we sat down and reviewed his entire financial plan. Here’s what we did to protect John’s retirement:

• We diversified his portfolio by moving a portion of his investments into bonds and income-generating assets, which reduced his exposure to market swings.

• We set up a cash reserve so John could cover his living expenses without needing to sell investments while the market was down.

• We stayed the course by sticking to a long-term plan, ensuring that John didn’t panic and sell at the worst possible time.

Over time, the market recovered, and John’s portfolio was able to regain its value. Had he sold off his stocks at the bottom, his financial situation would have looked very different today. Instead, he weathered the storm, and his retirement remained secure.

Conclusion: Protecting Your Retirement from Market Volatility

Market swings are normal, but they don't have to ruin your retirement. By spreading out your investments, balancing growth with income, having some cash on hand, and sticking to a well-planned strategy, you can protect your savings and ensure a more stable financial future.

If you're close to retirement or already retired and want to talk about how to shield your investments from market swings, feel free to reach out. I'm here to help you build a plan that keeps your retirement on track, no matter what the market does.