I am retired and living on social security and food stamps. I have all my money in two conservative retirement accounts. I can’t contribute money to them. I plan to make distributions in five years. What is the best course of action to save my money before the market crashes even more?
The key question here is how to protect your money during a market downturn. It’s something I hear perhaps more than anything else.
The answer may vary depending on the unique circumstances of the person asking. In particular, it depends on how you perceive the risk and what you are willing to do about it.
Here’s what you need to know about protecting your money when the market goes down.
A financial advisor can help you manage your savings and plan for retirement. Find a local advisor today.
The Investor’s Dilemma: Safety, Liquidity and Growth
In general, your investments can provide safety, growth and liquidity. But you can’t expect them to offer all three benefits at once. Since you don’t plan to take distributions for another five years, liquidity probably isn’t a top priority right now. (Of course, it’s still important to keep this in mind.) That leaves security and development as your primary concern. So, which of these two is more important?
In your case, it’s clear that safety – or avoiding losses from further market declines – is a major concern. You don’t have any extra cash to put into your investments, and the fact that they’re already so conservative suggests you don’t think they can take a big hit.
You might be right to think that. It’s hard to say without looking at the hard numbers. And there may be steps you can take to make your portfolio more conservative. On the other hand, perhaps your dissatisfaction indicates that a safety-first approach no longer cuts it.
The challenge: To beat inflation
The reason to invest in the first place is to maximize the value of your money as much as possible. Many obstacles stand in the way of this goal. But the one obstacle that will always be there, to some extent, is inflation.
So as an investor, your battle is first with inflation. And the only way to win this battle is to own something that appreciates in value faster than (or at least equal to) inflation.
Can you earn risk-free returns?
With all these principles established, let’s get back to the central question: How can you avoid putting your money at risk, but still earn a return on it?
Well, unfortunately, the short answer is that you can’t. No risk usually means no return.
That said, you can get minimal returns, with minimal risk, by investing in debt. In other words, you lend money to someone and get paid a little interest in return. Some examples include:
Certificates of deposit. These finance vehicles currently pay around 3% for 12 month terms. Your money will be held in the CD until the maturity date or you will owe a penalty.
money markets. These savings accounts pay about 1.5% today.
Government bonds. These government bonds currently pay about 3.1% for a two-year bond.
Treasury Inflation-Protected Securities (TIPS). This type of Treasury bond has a principal value determined by the prevailing rate of inflation, which affects the interest paid.
bind. The interest rate on this Treasury bond is determined by the current rate of inflation. The current interest rate for I bonds is at 9.62%.
These investments will not make you much money. But they will help soften the blow of inflation and won’t vary wildly in value.
Such modest benefits are enough for some investors. But it may not be enough for you.
How to approach your investments
Sure, you don’t have the income to spare right now, and you won’t start drawing on your portfolio for a few more years, so dabbling in low-risk assets sounds appealing.
But “starting” to draw from your portfolio is very different from depleting it. How long do these savings take to last? If you plan to draw from your portfolio over the next 20 years, you need to have some risk exposure if you want to keep up with (or beat) inflation.
The good news is that exposure may not be as scary as it seems. If you have a long time horizon and can get away with annual withdrawals of around 4% or less, you may be able to get your portfolio to a good spot with moderate risk exposure.
A well-diversified portfolio, for example, can have “buckets” of money with different risk profiles over different time horizons. You could have about a 25% stake in your nest egg in cash and bonds for short-term withdrawals.
A second quarter could go to high-yield bonds and stocks and have a six- to 10-year time horizon. The last half would be in the more aggressive “bucket”, with stocks and real estate. You wouldn’t plan on drawing from that bucket until 11 or more years have passed.
What should I do next?
As I always tell my clients, you don’t go from aggressive to conservative or vice versa. It happens gradually over many years, even decades.
And that’s true of investing in general: Whether things look exciting or scary at any given moment, remember that it’s about the long game. Success is more about sticking to your principles over time and less about picking the “right” horse at the “right” time.
Retirement Planning Tips
Work with a professional. From Social Security and alternative income streams to medical expenses and long-term care, there’s a lot to consider when creating a retirement plan. A financial advisor can help you through this complicated process. Finding a qualified financial advisor doesn’t have to be difficult. SmartAsset’s free tool matches you with up to three financial advisors serving your area, and you can interview your advisors at no cost to decide who is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
Why you shouldn’t panic during a bear market. Stopping investing during a bear market can reduce retirement income. This chart shows why you shouldn’t stop investing during a bear market.
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