If you lost a significant portion of your nest egg due to market volatility this year, consider yourself one of the fortunate ones. That’s because nearly half of Americans age 55 and older didn’t have any retirement savings stashed away.(1) While Social Security benefits may be the backbone of the U.S. retirement system, they are not enough to fully cover retirement expenses for most people.
Any time your portfolio suffers from a series of poor returns right around retirement age, it can irrevocably reduce principal. This means you could run out of money long before your retirement ends.
If you are approaching retirement, you need a plan. Your options may boil down to three tactics:
- Delay retirement or at least continue to work part time
- Reduce your expenses to align with the assets you still have
- Assume higher risks for potentially greater investment returns in the near future
Tactic #1: Delay Retirement
If you can manage to work a year or two longer than you planned, this can accomplish three goals. First, it allows your portfolio time to recover some of your losses. Second, while you’re earning money, you can afford to keep contributing to your retirement savings. And third, each year you delay taking Social Security (up to age 70), your benefit will increase.
If you really want to retire from your current job, consider picking up some other type of part-time work to supplement either Social Security or your portfolio – giving at least one of them the chance to accrue and replace that job income down the road.
Tactic #2: Reduce Expenses
Choosing between tactics one and two requires careful consideration. No matter how much you may want to retire, you might rather sustain your current lifestyle in retirement. Folks who don’t have much in retirement savings may have to deploy both strategies. The good news is that reducing expenses now can create a sustainable low budget throughout retirement. Consider downsizing to a smaller home. Not only will this reduce expenses such as utilities, maintenance, homeowner’s insurance and property taxes, but you may be able to redeploy equity from the sale of your home to generate a reliable retirement income stream – thus potentially replacing any recent market losses.
Tactic #3: Increase Your Risk
The third option is the most precarious and not generally recommended for people in or close to retirement. However, if you want to give your assets sustained market exposure, consider an index-linked annuity. This type of contract pays out a minimum insurer-guaranteed income with the potential for increases based on the performance of a specific market index.
At this point, a key strategy for your retirement plan is to create multiple streams of retirement income to help protect you from the future threat of market losses, changes in Social Security or even another pandemic.
1. Nadine El-Bawab. CNBC. April 5, 2019. “These people are on the verge of retiring — and they have nothing saved.” https://www.cnbc.com/2019/04/05/these-people-are-on-the-verge-of-retiring-and-they-have-nothing-saved.html#:~:text=About%20half%20of%20American%20households,of%202016%2C%20the%20GAO%20found. Accessed June 29, 2020.