Uncertain economic times may make you anxious about investing. They can also pose problems for existing retirees who live off of their investment income. Though the COVID pandemic has caused many investors to drop out of the market, the advice for people who plan to retire is to ignore short-term drops like this.
This isn’t the first turbulent economic time that people in the US have faced. Every generation has their own stories about economic uncertainty. You can learn important lessons about how to prepare by learning about other market crashes.
The first and most important lesson is that you should never dump your stocks when they’re at a low. Similarly, you shouldn’t buy stocks at exorbitant prices when you can invest in something less expensive. Maybe you’ve seen your stock values steadily plunge, and you don’t want to lose any more money. But when those values recover – which they always do – you’ll regret it. You might even end up owing serious back taxes.
Another important investment tip is to diversify. Make sure that you haven’t invested all of your money into one company, industry, or type of asset. You might have a retirement account without any other savings. During the 2008 financial crisis, many people lost up to 40 percent of their retirement savings.
One plan option is a target-date fund. This type of plan automatically diversifies your portfolio based around how long you have until you want to retire.
If you manage your retirement plan yourself, your assets should be invested into a variety of different accounts and ventures.
Retirement planners also recommend planning to have at least three income sources when you retire. The traditional trifecta is your investment portfolio, your pension, and your Social Security benefits. Pensions aren’t common these days, but you might use annuities instead.
The idea is to have income from enough sources that your finances remain stable even if one of those income sources suffers. Stocks are a good investment when saving for retirement because they provide long-term growth. But living off of profits from stocks during retirement isn’t such a good idea, because they can suddenly tank in value.
As long as you design your portfolio to give you stability in uncertain market times, you’ll be secure when you retire.
David A. Noyes and Co. is a DBA of Sanctuary Securities, Inc., Investment products and services are offered through Sanctuary Securities, Inc., Member FINRA and SIPC.