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If you’re like most retirement savers, your nest egg is invested, at least in part, in the stock market. Said stock market has just had the longest bull market on record and it’s still going. But for how long? Do you understand your defined-contribution plan, either 401(k) or 403(b)? Do you have an IRA? Are you wondering how to preserve your retirement savings in case of a downturn? Here are a few tips for you, not from a financial professional, but from someone who like you has been saving with these plans for retirement.
How long till you need the money?
If you have 10 years or more you can sit tight and let your retirement savings grow by keeping the contributions coming in. If there’s a downturn that just means that whatever you’re buying with your savings will be cheap. Later on, when the market goes higher, those cheap shares will be worth a lot more. Trust me. I stayed in the market the whole Great Recession and came out pretty well, considering my company had to quit matching funds for several years to stay solvent.
The trick is not to get emotional about it. If you get emotional you will end up cashing out when things are cheap and lose your money. As long as you don’t cash out you have a future with that money. You can make money in the market by staying in. Once you’re out, all you get is interest on the low price you sold at, if you’re lucky. And interest even at today’s rates online is a losing proposition as a long term investment.
It gets different when you are getting closer to needing the money to live on.
My plan is to retire in July 2019. That makes my timeline pretty short, about 10 months as of now. And then there are six months till the new year when the tax bite for my first withdrawal can be managed. When that 16 months is up, I want my first withdrawal, and second, and maybe third, to be there for sure.
So to start, I took out a little of my IRA, which is in an index fund. Why? Because it is still making money, and it will lose value in the next downturn. That means that most of that IRA will still gain while I’m slowly backing money out of it. I don’t totally lose the gains while the market is good, and I don’t totally take a bath when it tanks.
Meanwhile I have most of my retirement savings in its baskets, and just what I need in a close-to-cash state that won’t change on me with every weird headline. This is me being my kind of careful, not a market-timing recommendation.
Diversity is your friend
You’ve probably heard of diversification. That’s fancy talk for putting your eggs in more than one basket. So when I ease money out of the index fund and into a nice safe money market fund, that’s one way to diversify.
Another way is to own different kinds of things. I not only have stocks in that index fund, I also have a bond fund that ought to do better than stocks in a downturn. And I have a target date fund. That is a combination of stocks and bonds that reach a balance that makes sense for my age. The financial geniuses have ways of figuring that out. I just picked that to balance the other two for risk.
That is really why you diversify, to spread the risk. All your money doesn’t make more money at the same rate and time. If stocks go down, bonds can take up the slack by paying better than beaten-down stocks. If stocks go up, bonds lag. That’s just the way it goes. By balancing them you have something doing pretty well most of the time.
To preserve your retirement savings, you want some balance. There’s a rule of thumb to figure out how much you ought to have in stocks: subtract your age from 100 and the result is the percentage of stocks in your nest egg. At 65, you should have 35% stocks to be safe.
Getting carried away with diversification
It’s easy to get carried away with spreading your wealth around. Someone will tell you all about the great profits to be made in international funds, or junk bonds, or the fund of the month, and it sounds like such a good plan to pinch off about $10,000 just to be there. But stop and think.
Every time you buy into some new variety, you incur more costs. Owning funds, stocks, or bonds isn’t free. It costs to get in. And to get out when it’s time. Meanwhile, your brokerage firm or fund manager will need maintenance fees, all of which come out of your investments.
Best to get a guy (below) to run decisions like this by, just for a professional opinion. If you do buy into a new thing, shop around for low fees. They add up over years of holding.
I am no financial genius. My company pays a financial advisor to help us social services people who wouldn’t know money if it bit us. He is on call and comes around a few times a year to teach us about the market and how our defined-contribution plan works.
If you work for a company like mine, take advantage of that guy. Chat him up when he’s in town. Come up with a question every time he’s around. Call him if you want.
A certified financial planner that works for fees is good too, if you don’t have a guy through your company. Certified financial planners don’t have to sell you stuff to get paid, unlike insurance brokers or stock brokers. You want to know the guy who is laying out your finances for you has got your back. We had a rule in this country that required financial professionals to consider the harm they could do by messing you over for profit, but that’s gone now.
Whoa, you say, that’s rich for my blood. You could set up an IRA with a company like Vanguard, which is the one I like because they are low-cost. (And by the way, this isn’t an affiliate link.) They also run webinars and have helpful and educational blog posts and articles about retirement planning, taxes, and other subjects. Those are all free. What a resource!
By the way, there are plenty of other companies that sell mutual funds and do IRAs for people. Some cost more than others and offer more services than others. It’s good to shop around.
Preserve your retirement savings from yourself
Now, this part is for those of you who are years away from needing your retirement savings for your expenses in retirement. But suppose you need some money for major renovations, a new car, someone’s college or some other big expense. And the biggest pool of money around happens to be your defined-contribution plan.
DO NOT borrow from it. Why? Say you have $80,000 in your plan. Wow, that’s a lot of money to you right now. What could it hurt if you took out, say, $30,000 for a car since your old clunker costs a lot to repair constantly? Do that, and suddenly the amount you have growing for you isn’t $80,000 but $50,000. Even while you pay back you’re bleeding opportunity.
Click here for details on how borrowing against your nest egg works against you.
Simply put, if you could make 8% a year on your investment you would make $6400 on the $80,000 in a year, but only$4000 on $50,000. So the first year you lose $2400 on your nest egg’s earnings, but you also depreciate your car. Plus, you will never catch up to what you would have made over the life of the loan. So just don’t do it. You’ll be glad later.
Whew, I’m tapped! Do you have any other ideas to share on how to preserve your retirement savings? Do share!