Many people are concerned that a downturn in the economy or a bear market will prevent them from retiring, but that doesn’t have to be the case! You can get through both good and terrible times with the aid of a well-designed, comprehensive retirement plan.
I’ve talked about the value of long-term planning in prior writings. When you lay out a timeline of key financial goals and determine how to reach them, this process entails regular discussion and preparation with your significant other (such as setting up a quarterly financial date night).
Most people find that the greatest, scariest, and most challenging undertaking to take on is retirement planning. Thankfully, there are things you can do right now to assist. There is never a bad time to consider retiring. The benefit of having a plan is that it offers you a roadmap and makes those abstract goals appear more realizable. Your plan must be adaptable to adjust to life’s ups and downs.
Here’s how to create an adaptable retirement strategy.
Create a lengthier retirement plan.
People frequently underestimate how long their retirement assets will be needed to support them and/or loved ones, which is one of the largest planning errors. It’s simple to overlook that people approaching retirement age are living longer and healthier lives than earlier generations, even if you plan to retire at the conventional age of 65. You’ll have more time to accomplish all of the exciting activities you’ve planned, which is fantastic news. However, it also implies that you will need to increase your retirement savings.
Start by looking up average life expectancies to get an idea of how long you’ll need your money to survive, but don’t rely only on them. For instance, according to the most recent CDC life tables, a 65-year-old on average may expect to live to be 84. So even though you might believe it’s appropriate to prepare for a 19-year retirement that begins at age 65, it’s a bad idea!
Although they are simply averages, those life expectancy statistics are a good place to start. You may need to plan for a lot longer if you and your partner are in good health, your family has a history of longevity, or you need your money to last longer than your life expectancy (for example, to pay for your grandchildren’s college tuition or philanthropic causes).
Overestimating how long you could need your money to support you and your family is one of the best choices you can make for your retirement plan.
Plan your savings.
It will be easier to track your progress and determine how much money to set aside for future expenses if you have an estimate of how much you can save each year, quarter, or month. I have annual goals, but you should do what is best for you. For me, a 12-month period allows me enough time to make up for hiccups in my income or expenditure and get back on pace to meet my annual target.
Strike a balance between what is realistic and what is doable when you set your objective. Although you shouldn’t be so rigorous that you don’t enjoy yourself along the way, keep in mind the saying “pay yourself first.” trite but accurate To avoid being tempted to spend the money, I have my auto-deposit set up to transfer funds into both my brokerage account and my 401(k) before they ever reach my checking account.
Organizing your money into categories according to your various objectives might also be useful. If you have $500 extra each month, you could set up an automatic transfer of $200 to your 401(k), $100 to a child’s college fund, $100 to a rainy day fund, and the remaining $100 to go toward yourself and your family.
Consider adding a little bit more to your rainy-day fund if you receive an unanticipated windfall, such as a bonus at work or an inheritance, in case you don’t meet your future savings targets.
Recognize the need for investment expansion.
The initial stage is just to save money. You also need that money to increase along the road if you’re going to reach the objectives you’ve set. Furthermore, you might require more development than you think!
As retirement approaches, a lot of individuals think they should invest in “safer” assets, which frequently entails owning more bonds and fewer stocks. It used to be said that you should invest 120 divided by your age to determine how much of your portfolio should be allocated to equities. Wrong!
Bonds’ normally lower short-term volatility also implies that you can lose out on stocks’ better long-term gains if you decide to switch from stocks to bonds. Compared to stocks’ 10% annual returns since 1925, U.S. bonds have only returned an average of 5%. Stock investment might be a wiser alternative if you require long-term portfolio growth to prevent running out of money in retirement.
Don’t get me wrong; having bonds in your portfolio has many very good reasons. They can lower portfolio volatility and ensure that you have access to funds when you need them, especially during shorter time periods.
Make sure you weigh the advantages and disadvantages to enable you to make an informed choice when selecting your investment allocation, which is another way of describing the portion of your portfolio you should invest in bonds, stocks, and other assets. And here’s a hint: if you don’t feel capable of making that kind of choice, think about getting a professional money manager to assist you.
Although you should check your plan frequently, try not to worry about it constantly. The temptation to react to the typical market blips when you review your investments every day can do more harm than good. The inevitable ups and downs of markets are the cost of stocks’ greater long-term average return, which has historically included some brutal downturns.
There are several simple strategies to recession-proof your retirement plan right now, including planning for more years, saving more during prosperous times, and investing for long-term development.
