What retirees and older workers can do to protect their economies from stock market volatility


Older workers and retirees may be nervous on what the volatile stock market of late means for their nest eggs. So, here is why now is the time to stay calm.

All that has happened so far is that the market has pretty much returned its earnings for the year in 2018. If you've been investing in the stock market in recent years, you've probably had very good returns – much better returns than if you had invested in securities or other "secure" investments.

Also understand that no one can safely predict When the market will fail or recover. The best you can do is to adopt strategies that will help you overcome stock market crashes when they happen – without having to know exactly when they will happen.

To that end, here is a two-step strategy that can protect your retirement from stock market failures:

  1. Develop monthly life annuity sources that do not fall if the stock market falls. Use these "retirement checks" to cover your basic expenses, or at least get close. Basic living expenses include housing, utilities, food, medical insurance premiums, and property and income taxes.
  2. Invest the rest of your savings to generate "retirement bonuses" that have growth potential but that could fall if the stock market crashed. Use these bonuses to pay for discretionary stay expenses like travel, hobbies and pampering your grandchildren. I hope you can reduce these expenses when the market fails.

Sources of "retirement checks"

The best source of retirement paychecks is Social Security because it protects against three types of risk: stock market, inflation and longevity. It makes a lot of sense to maximize your Social Security benefits with a delay strategy.

Another good retirement salary is a monthly pension from a defined benefit plan (if you're lucky), whether it's a traditional plan or a cash balance plan. Whatever you do, resist the temptation of take a fixed payment, if you are offered that choice. Because? It is very difficult to generate more annuity income for retirement by investing the total amount, rather than simply elect the monthly pension. If you choose the fixed amount and invest it, your money will be vulnerable to collisions in the stock market.

If you need more retirement funds to cover your basic expenses, consider using a portion of your retirement savings to buy immediate low cost insurance. fixed income annuity which you can purchase from an insurance company through a platform of competitive annuity offers such as Income Solutions. It's like buying a personal pension.

Sources of "retirement bonus"

Once you have covered your basic living expenses with a portfolio of retirement payments, you should feel confident that you may face a stock market crash. This can allow you to invest significantly your remaining retirement savings in the stock market, whether in a low cost date fund, balanced fund or stock index fund. You can use a systematic withdrawal strategy to calculate your annual retirement bonuses, or you can simply use the IRS minimum distribution required to determine their annual withdrawals.

Another way to generate retirement income from your retirement savings is to use only interest and dividends to pay for subsistence expenses and keep your principal intact. The volatility in the value of the investment cash flow is much smaller than the volatility in the value of the underlying investments. I hope this strategy also allows you to overcome the shortcomings of the stock market.

A warning for older workers

Are you within a few years of retirement and fully invested in a target date fund? If this is the case, you may want to take steps to protect yourself if the market fails before you retire. Your first priority is to avoid the need to start Social Security before the best date for you due to a health waiver or shock. To achieve this goal, consider building a "retirement transition deposit" with part of your retirement savings. Invest that bucket into funds that will not fall if the market falls, such as money market funds, short-term bond funds or stable value funds.

Your retirement transition balance is likely to be equal to a few years' worth of Social Security payments that you are delaying. You may also want to add to your retirement transition basket if you feel more comfortable with an extra cushion of cash to cover your basic living expenses during the period covering a possible stock market crash and its aftermath.

Once you do this, you can invest your remaining savings significantly in the stock market, confident that you will be able to overcome the stock market crashes.

For more details on some of the strategies outlined here, see this recent article from the Stanford Center on Longevity, prepared in collaboration with the Society of Actuaries.

Do not worry, be Happy! Takes steps to protect against the inevitable stock market crashes that will happen during his life. So, enjoy your retirement.

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