A volatile stock market can wreak havoc on anyone's peace of mind, but typically hurts retirees the most. Paychecks keep the employed afloat, but most retirees don't have a job-related income source. Retired individuals typically live on income from Social Security and withdrawals from their IRAs or 401(k)s.
When those account values plummet, retirees need a backup plan. Only 39% of retirees today feel financially prepared for a bout of stock market volatility, according to a new Principal survey. If you're in the other 61%, here's how to get ready.
1. Move assets
Investing heavily in stocks provides growth opportunities for workers. Retirees, however, should have more of their assets in bonds, which react less severely to the kind of news and political events that often put stocks on a downward spiral. If your retirement plan is loaded with stocks, move assets around so more of your savings land in bonds. Right now, the market's in pretty good shape (heck, the Dow just hit 30,000), so it's a good time to reallocate.
2. Have at least a year's worth of cash on hand
While it's wise to have a large chunk of your investments in bonds during retirement, you should still aim to keep roughly half of your portfolio in stocks during your 60s, 40% or so in stocks during your 70s, and a good 30% in stocks during your 80s. You should never fully get rid of stocks in retirement; you need them to generate growth that will allow your portfolio to keep pace with inflation.
Plan to leave your portfolio alone during a rough patch. Feel secure in the face of stock market volatility by setting aside a minimum of one year's worth of living expenses in cash. That way, you'll give your portfolio ample time to recover from a nasty downward swing.
3. Secure a backup income source
Relying on Social Security and your retirement portfolio for income isn't a terrible plan, but it's nice to have a backup income source when stocks tank and you need more flexibility. A home equity line of credit, or HELOC, is one option if you own your home. With a HELOC, you'll get access to a line of credit you can draw against as needed. That way, you won't accrue interest on money you don't end up having to borrow.
You deserve to feel secure in your ability to ride out a stock market downturn. If you fear that you're ill-equipped to get through a period of volatility, make changes before you wind up dangerously stressed out.