Many retirement investors have a considerable percentage of their investment in stocks and this has generally served them well. Stocks have recently been on a roll – indeed booming – at or near all-time highs. Some pundits think the market is a bit extended. So what should you do to prepare your retirement nest egg for the next downturn?
How a Market Crash – or Even a Downturn – Can Wreck Your Plans
Here’s a scenario that may be more common than you think: Sam, aged 54, has been working for 30 years and is closing in on his retirement. He has been lucky in that he was able to save a little of each paycheck and put that money into a qualified plan. He followed the general recommendations given by the plan administrator and therefore has a fairly high percentage, about 70%, of his total in stock mutual funds and individual issues. Consequently, over the years, his account has blossomed into a very nice six-figure sum.
Early 2018 was relatively rough for some investors and Sam took notice. He became more than a little concerned that his money was evaporating before his very eyes. He decided to re-evaluate but exactly what should he do?
A scenario such as this shows why it is critical to plan for any downturn, especially one that might occur in your post-working years. Take effective steps now that will safeguard your hard-earned savings, especially if you are near or in your golden years.
Steps to Take Before the Next Downturn
- Review Your Stock Holding Allocation
You may be too heavily weighted in stocks. Many advisors recommend a high percentage of stocks in your investment mix when you are young and just starting out, say 60 to 70 percent. Perhaps it is wise to begin with that allocation but as you near or are in your post-working life, a smaller percentage may be much more prudent. There is no single stock/fixed-income mix that is best for everyone. However, when the bear growls, cash is king. Having a nice percentage of your investment mix safely in cash will not only dampen the volatility of your portfolio but will give you some dry powder to buy if stocks become really cheap. - Tweak Your Budget
While you are at it, create a “golden-years” budget. It can be as simple or as elaborate as you like. Pay special attention to things such as health care and insurance, as well as prescriptions drugs, which may cost more as you get older. Conversely, the amount of money you spend on clothing for work or gas for commuting may decrease. - Can You Generate Other Income?
If your evaluations indicate you may not have enough saved, consider a side-gig after leaving full-time employment. Many folks find that freelancing, advising or other such endeavors not only bring in extra dollars, but they are fun and keep the mind sharp. - Remember: Patience is a Virtue
Finally, don’t panic if the stocks head south. Position your portfolio well and realize all down markets are followed by the inevitable upswing. Having some cash will give you the ability to purchase quality issues cheaply.
Tanking stocks can have a big negative impact on your nest egg. Planning now makes good sense.
It may not be possible for every parent to do that and even those who manage should not expect to save all the money their children need, but they can certainly help reduce the amount their children need to borrow by learning to balance their savings.
Start by Maxing Out Your 401(k)
Borrowing from a 401(k) to fund college costs is a plan that can quickly backfire. With early withdrawal penalties and taxes, it’s an expensive option that should probably be avoided. But a saver can make sure to max out their employer matching contribution to increase the amount that’s saved toward retiring and reduce their personal savings burden.
Check Out Your State’s 529 Plan Options
Planning for college is hard when tuition costs keep rising but in some states, a 529 plan can help by allowing you to prepay tuition costs, locking in today’s prices. However, not every state sets up their 529 plans that way. In some states, the plan acts as a normal savings account.
Get Help with Financial Aid
Taking on the entire burden of school costs without looking into financial aid is a huge mistake, especially since about 66 percent of full-time students in the 2014-2015 school year qualified for some financial aid. Have your child work with the school’s financial aid counselors to determine which programs, grants and scholarships they might qualify for.
Automate Savings Deposits
Planning to save money and really saving it are two different things. One way to ensure you actually save for both your retirement and your kids’ tuition is by automating your savings deposits. In addition to automating your 401(k) through work, you can automate transfers from your checking account to your kids’ tuition funds and your IRAs every week or month. There are also some bank programs and apps that can allow you to regularly save $1 with every debit card purchase or save the change difference between your sales totals and the next rounded up dollar.
Open an IRA
Every year, you can deposit a good chunk into an individual (non-employer) retirement account called an IRA. You can choose between a tax-deferred Traditional IRA or a tax-free Roth IRA. (Roth IRA distributions tax-free if made 5 years after the initial contribution to the plan and you are over 59 1/2.) If you’re in a high tax-bracket now, the Traditional IRA can help you reduce your tax burden, which may leave you with more cash to save toward your dual goals. Choosing a Roth means you can take tax-free distributions later on which reduces the amount you need to have saved.
Even if you can’t fully fund your kids’ tuition costs, the savings you amass can reduce the number of loans they need, putting both you and your child in a much more secure and comfortable financial position during your future golden years.
Add Traveling Expenses to Your Budget
The first step to take when planning for trips is to properly fund them. One of the easiest ways to accomplish this is to incorporate traveling expenses into your regular budget. Many retirees create an annual budget and they break this down into a monthly budget. Even when retirees incorporate a line item for traveling expenses into their budget, they often fail to budget enough money for these experiences. Depending on your plans for various trips, a single trip may easily cost you several thousand dollars or more. If you plan to travel at least a few times per year, your budget will need to be adjusted accordingly.
Prioritize Your Trips
If you are like most retirees, you may have a lengthy list of desirable amazing destinations. However, you may only be able to visit a few destinations each year. Prioritize the trips that you want to take so that you can cross those off your list first. Remember to factor in costs for your trips to visit family with your recreational trips. Determine which trips you want or need to take each year. This is essential if you want to properly allocate funds in your budget for all of your planned trips.
Research Expenses
The expenses for each of your planned trips will vary substantially. For example, you may have plans to drive to a few national parks and to take a trip to Europe a few months later. The Europe trip will be much more expensive. With both types of trips, you need to essentially create a detailed itinerary. Research accurate costs for each aspect of your trip so that your budget is realistic. Remember to factor in funds for food and gas.
Look for Savings
Seniors often qualify for special savings at restaurants, theaters, stores, hotels and more. When you begin planning each of your trips seriously, spend time analyzing all discounts available. Look for alternatives, such as staying at a different hotel that may offer a senior discount. Take advantage of senior discounts and be aware that other discounts and savings may also be available. For example, you can travel during a non-peak season to save a substantial amount of money. You can buy plane tickets on non-peak days or in the very early or late hours of the day. These are only some of the many ways that you can potentially save hundreds or thousands of dollars on your trips.
Traveling may be one of your primary goals in retirement but your dreams of taking amazing trips will not happen if you do not have money available. As you can see, you will need to budget properly for them in various ways in order to have funds available for your trips. You can get started today by adjusting your budget and researching desirable destinations that you want to visit within the next year. By doing this, you can get the wheels in motion for taking exciting trips to amazing locations.
Source: http://money.cnn.com/2018/02/05/retirement/budget-travel/index.html
