If you're nearing retirement, a potential recession could wreak havoc on your plans.
The bad news is that nobody can predict exactly when a recession might begin, how long it might last, or how severe it may be. Downturns are also a normal part of the market's cycle, so a pullback is bound to happen at some point.
Fortunately, there are steps you can take to protect your retirement against potential market volatility.
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1. Double-check your asset allocation
Asset allocation refers to how your investments are distributed within your portfolio. Most people invest in a mix of stocks and bonds, and how much of your portfolio you dedicate to each can determine how your savings fare during a market downturn.
Stocks are higher-risk investments, as they're more vulnerable to market volatility. They also tend to earn higher average returns, though, helping your savings grow faster over time. Bonds and other conservative investments are safer in that they're less affected by market swings, but their lower earning potential can be a drawback.
Generally, most workers benefit from gradually adjusting their asset allocation to be more conservative as they age. Even in retirement, it's wise to keep at least some money invested in stocks to encourage more growth. But if you're going to be withdrawing your savings in the next year or two, a more conservative approach can better protect against volatility.
2. Protect your emergency fund
Your emergency fund should ideally be separate from your retirement savings, as you may need this money at a moment's notice. If all of your emergency savings are invested in the stock market, there's a chance you may need to withdraw your money after stock prices have dropped -- potentially locking in losses.
If your emergency fund is lacking, now is the time to beef it up as much as you can. With at least three to six months' worth of easily accessible cash in a savings account, it will be easier to avoid pulling money from your retirement fund before you're ready.
3. Keep a long-term outlook
Even the worst recessions and bear markets are temporary, and they rarely last longer than a year or two. While it may feel like an eternity in the moment, the average bear market since 1929 has only lasted around nine months.
Market downturns can be difficult to stomach, but it's important to avoid making emotionally charged decisions -- like withdrawing all of your savings out of panic. Staying focused on the long term can make it easier to keep a clear head when the market eventually turns.
Facing market volatility in retirement is tough, but the right strategy can make it a little less daunting. Proper asset allocation, a healthy emergency fund, and a long-term outlook can help protect your savings, no matter what the future holds.
