It's been a whirlwind couple of years for the stock market. Following the market crash in March 2020, stock prices have reached staggering new highs. In recent months, though, the market has been shaky.
There are a slew of factors that could impact the stock market. Inflation, for example, continues to soar. Many companies are still facing a labor shortage. And some people worry that surging housing prices could result in a bubble -- and if that bubble bursts, we may be in for a market downturn.
If you're nearing retirement, all of this uncertainty can be unnerving. Does that mean you should consider holding off on retiring until the market stabilizes? Or is it still safe to retire now? Here's what you need to know.
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Should you retire when the market is volatile?
In theory, it may make sense to wait to retire until the market is more stable. That way, you don't need to worry as much about a market crash hurting your retirement savings.
However, stock prices are constantly fluctuating, and nobody knows how the market will perform over the coming months or years. While factors like a housing bubble and rising inflation could contribute to a market downturn, there's no way to know for certain whether a crash is looming.
Case in point: When the COVID-19 pandemic first began, many experts predicted we'd experience a prolonged bear market. In reality, though, after a brief crash, the market went on to see two of its best years in history.
The stock market will always be unpredictable to an extent, and if you're waiting for the perfect moment to retire, you could be waiting a long time.
How to protect your savings against a market downturn
While there may not be a perfect time to retire, there are steps you can take to keep your money as safe as possible during periods of volatility.
First, double-check that your portfolio is well-diversified. When you own a wide variety of stocks from different industries, there's a much better chance that your retirement fund will survive a market downturn.
Also, make sure your asset allocation is appropriate for your age. In general, the older you are, the more conservative your portfolio should be. Although it's wise to keep at least a small portion of your savings invested in stocks, when more of your money is in bonds and other conservative assets, your savings won't be as affected by market volatility.
There's no hard rule as to how much you should invest in stocks versus bonds, but a common rule of thumb is to subtract your age from 110. The result, then, is the percentage of your portfolio that should be allocated to stocks, with the rest being allocated to bonds and other conservative investments.
Are you ready to retire?
If you've taken steps to prepare your portfolio, there's no reason you can't retire when the market is volatile.
That said, it's important to make sure your savings are adequate. Social Security benefits are only designed to replace around 40% of your income, so the majority of your income in retirement will likely need to come from your personal savings.
If you retire but then run out of savings, you might have to reenter the workforce down the road. But if the market has crashed and jobs are scarce, that could be challenging.
Before you retire, double-check that you're saving enough. If your savings are falling short, it may be worthwhile to hold off on retiring to give yourself more time to prepare.
The stock market plays an important role in preparing for retirement, but there are ways you can protect your money. By building a diversified portfolio, checking your asset allocation, and saving enough, you can rest easier knowing you're prepared no matter what may happen with the market.
