The coronavirus pandemic has disrupted our daily lives and affected nearly every American, and it's also taking its toll on the economy.
For those who are decades away from retirement, this economic downturn should be no cause for major concern. The stock market tends to correct itself over time, so even if the country does slip into a recession, eventually, you should see your investments climb back up once again. In fact, right now is a fantastic time to start investing if you haven't already. Because stock prices are so low, you can potentially see significant gains over time by investing now.
But what if you're close to retirement, and your investments have taken a nosedive? The first step is to avoid panicking and try to keep a clear head. Then, take these few steps to make sure you're protecting your retirement as much as possible.
1. Be willing to adjust your retirement age if necessary
While the stock market can be fantastic when saving for retirement, it can also be unpredictable. So even if you have a thorough plan for your future and know exactly when you want to retire, you may need to adjust those plans.
Depending on what your savings currently look like and how close you are to your expected retirement age, you may need to postpone retirement by a few years. Consider your savings goal, then think about how long it might take to reach that target.
If your current savings aren't too far off from your goal, you may be able to supercharge your investments over the next few years as the market recovers and still be able to retire on time. But if your savings have been hit hard and you were hoping to leave your job within the next year or two, you may be better off saving for a few more years before you retire.
2. Don't sell your stocks or cash out your retirement fund
When the market is in a free-fall, it can be tempting to pull all the money from your retirement accounts. If you're worried the stock market is only going to get worse, you may think you're doing the right thing by cashing out now, before you lose any more money.
However, cashing out now could be a costly mistake. For one, if you withdraw money from your 401(k) or traditional IRA before age 59 and 1/2, you'll need to pay income taxes and a 10% penalty on the amount you withdraw. In addition, when you sell all your investments when the market is at a low point, you'll be missing out on all the potential gains you could see when the stock market starts to recover.
Although the market may be going through a rough patch right now, the best thing you can do is ride out the storm and wait for your savings to bounce back on their own. Given enough time, they will bounce back on their own.
3. Reconsider your asset allocation going forward
Asset allocation refers to how your investments are diversified. As you get older, you should be adjusting your asset allocation so more of your money is invested in conservative investments such as bonds, with less money going toward riskier investments such as stocks.
Ideally, you should be making these adjustments even when the economy is booming -- because you never know when a recession will strike, and you want your money to be protected before the stock market dips. But even in the midst of an economic downturn, it's a good idea to double-check that your investments are diversified properly going forward.
Before you invest any new money, think about your tolerance for risk and consider how you want your cash to be allocated. If you're nearing retirement age, that may mean investing more in bonds going forward so your money is as safe as possible if the stock market falls again in the future. If you're unsure about how, exactly, to invest your money, you may want to talk to a financial advisor to get personalized advice regarding what's best for your unique situation.
These are uncertain times, and this pandemic is concerning not just from a health perspective, but from a financial perspective as well. Although much of what happens with the stock market is out of your control, you can take a few proactive steps to ensure you're doing as much as you can to prepare for retirement.