Don’t touch your face, and don’t touch your stocks–that advice went viral in the past few weeks, and it goes for retirement savings, too.
Like so many of you, I am trying to do everything imaginable right now to support the health of medically fragile family and friends.
But the only thing I haven’t woken up thinking about is whether I should be changing the way I’m saving for retirement. Here’s why: We’ve been on this roller coaster ride before, and we were just as uncertain in those times, too. No one knew what would happen in 2000 when the tech bubble burst, or in 2001 after the September 11 terrorist attacks. How we would emerge from the financial crisis in 2008 was a mystery for at least a few years.
I had a front-row seat for those economic calamities as a personal finance journalist covering retirement planning. In those earlier times of uncertainty, I interviewed hundreds of people at all stages of their career and retirement, along with financial advisors. Many of the people who suffered financially were those who reacted emotionally–taking action right away.
Of course, there are difficult circumstances that may call for scaling back, or stopping, retirement savings temporarily. Many families are dealing with layoffs, lost business and bills they can’t pay. Even for those more fortunate, it’s always smart to focus on building emergency savings and managing debt.
For frontline workers—nurses, doctors and educators—the added layer of questions about market volatility and retirement savings can feel overwhelming right now. Should you stop contributing to your retirement plan? Overhaul the way you invest? Find a financial planner, stat?
Hold on a minute. Rushing a decision about retirement savings could lead to regrets and cost you more money unwinding a hasty move down the road. Here are some stories from recent times of turmoil that provide lessons for people at different points in their career.
I remember a 20-something friend who, when the markets were falling in 2000, confided that he’d just liquidated his 401(k) because he couldn’t stand to lose any more money. “I’m out,” he said, throwing up his hands. The real pain came the next year, when he learned he owed hefty tax penalties for that emotional move.
Other people who kept their savings in a workplace plan but sold off sinking equity funds also lost out. It’s easy to forget to re-invest when markets start to improve, leading to a classic error: They sold low and then bought high.
The problem is, there’s no way to know exactly how long, or when, financial markets will hit bottom and start to bounce back. So there’s really no point in trying. The lesson here is that it’s best to focus on what we can do and let our investments ride.
After a decade or two of making regular contributions in your retirement accounts, especially with employer contributions, it’s exciting to see savings add up. In the mid-2000s, a heady time for the markets, many mid-career investors moved savings into equities, dreaming of retiring early.
Then real estate lending started showing cracks, leading to 2008’s full-blown financial crisis. Retirement savings tumbled as much as 40% in value. That meant people with $1 million suddenly had $600,000. One retired banking executive I interviewed had invested his life’s savings in financial services stocks because he felt comfortable investing in what he understood. By early 2009, he was back at work running a bank’s foreclosure unit to make ends meet.
It’s a great illustration of why we shouldn’t put all of our eggs in one basket. Some retirement plan choices, such as target-date funds, will diversify our investments for us based on when we plan to retire.
But if you want to choose your own retirement plan investments, it’s important to keep your asset allocation on track. If you haven’t thought about it in a few years, or ever, consider asking a financial advisor to help you make sure your current strategy aligns with your goals.
As you get closer to retirement, it’s important to consider additional ways to diversify beyond stocks and bonds. Increasingly, real estate, alternatives, annuities and other types of assets can provide more ways for retirement investors to spread risk.
Retiring—now, or later?
So, if you are getting ready to retire, should you wait? It depends on how you expect to generate your retirement income and how much cash you’ve set aside.
Retirement planners use models to talk about how to create your income stream. The most classic is the “three-legged stool” of Social Security, investments, and a pension (all but extinct) or annuities. There are many variations on “buckets” to hold cash and both short-term and long-term investments, with earnings trickling from the longer-term holdings to cash.
If your “three-legged stool” includes enough sources of guaranteed lifetime income, or your “buckets” hold enough cash to avoid selling off investments that have lost value, you may be in good shape. If you’re not already working with a financial advisor, it might be worth getting a second opinion.
However, if your investments are still heavily weighted in stocks, you may want to re-evaluate your timing. If you do decide to delay your retirement date by a year or two, consider the approach that some would-be retirees took in 2008: By working a few more years than originally planned, they increased the size of their monthly Social Security checks.
Meanwhile, to reward themselves for staying on the job, they used a small part of their would-be savings to go ahead with a few retirement goals, such as travel or a kitchen renovation.
As you can see, amid so much other uncertainty right now, retirement planning is one part of your life that can be managed—either on your own, or with the help of a financial advisor. No matter where you are on your career path, there are strategies for dealing with market volatility while continuing to save for your financial future.