Those of you who are heavily weighted in stocks may be a bit concerned about the impact of the equity market’s decline on your retirement plans.
The S&P 500 has lost 16% this year. If you now have to take money out of stocks to fund your retirement spending, you could be selling at a much lower price than you would have a year ago.
Christine Benz, Morningstar’s director of personal finance and retirement planning, has offered an analysis of how people of all ages can protect their retirement plans from sagging stocks.
She worries the least about people under 50 because they are a ways away from retirement. “But this is probably the first bear market for many of these folks,” Benz said. “These bear markets early in your investment career can be incredibly nerve-racking.”
Contribution Rate Control
It’s important to recognize where you have control. “The main one at this life stage is your contribution rate,” Benz said.
“That is going to be the main determinant of your plan’s success or failure. And the good news about down markets is that with the same contribution rate, you can buy more shares than you could have when the market was more elevated.”
Perhaps you can even lift your contribution rate. Also, “check your asset allocation and make sure that you have a plan for rebalancing back to that target asset allocation,” Benz said.
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“A target-date fund is a good tool for keeping your portfolio’s asset allocation on track because part and parcel of such a fund is that rebalancing is built in.”
For those of us retiring soon, “contribution rates are super important at this life stage, too, because they will be retired for many years,” Benz said. “So contributions that they make today can still compound and make a difference in the health of their plans.”
Asset Allocation for Your 50s and 60s
As for asset allocation, “if you’re in your 50s or early 60s, you generally want to be looking for balance in your retirement portfolio,” she said.
“So, you absolutely need stocks for long-term growth, but you also need some safer investments in your portfolio. You want high-quality short and intermediate-term bonds.”
For people who are already retired, again the issue is focusing on what you can control, Benz said. Withdrawal rates are an example, if that’s something you can change.
“In really good markets, like we had from 2019 through 2021, you could potentially take more from your portfolio,” Benz said.
“The trade-off is that when things are down as they are today, if you can potentially take less, that is something that can be hugely advantageous to your plan.”
It may be tempting for retirees to spend much of their day focusing on the market, for example, watching the business channels.
“Don’t do that,” Benz said. “For your own mental health, really stick with whatever plan you have for monitoring your portfolio.”