9 Ways to Protect Your Retirement Income When Markets Are Volatile

Most people rely on their retirement savings accounts, such as a 401(k) account or an IRA (individual retirement account), for the non-working years of their life. While these plans supplement Social Security benefits, they are also prone to market volatility. A downturn in the market could have severe implications on your retirement income from these accounts. But since these savings tools allow more control to the investor, it is possible to protect the retirement income from the volatility in the market.

Here are 9 key tricks that can protect your retirement income when markets are volatile:

• Build an emergency fund

The dynamicity of the markets requires a lot of attention and focus. Even though investment portfolios deploy near-to-accurate strategies, the market movement is hard to predict. This can cause a significant fall in the value of retirement accounts such as a 401(k) account and an IRA. To safeguard your income from such possible scenarios, it is beneficial to create an emergency fund or a buffer. When the market experiences a downturn and the value of these accounts goes down, the buffer can substantiate the loss in income. Moreover, this particular fund can help you stay put towards your retirement goal and not use the funds to take care of immediate needs. That said, it is important to save up to at least 15-20% of your current income as an emergency fund.

• Maintain the right portfolio mix

A critical tip that can protect your retirement income during market volatility is the right portfolio mix. A right portfolio mix is a subjective term. This implies that your asset allocation should match your risk appetite, age, time horizon, and financial goal. For instance, if you are an investor close to retirement, your portfolio should include more secure assets, such as bonds. The share of equities, in this case, should be minimum as they have a higher risk potential. As a general notion, with advancing age, the portfolio mix should preferably be more conservative in approach to safeguard your retirement income.

• Rely on diversification

It is not enough to have the right mix of assets – equities, bonds, and others. For a foolproof plan, it is also advisable to maintain a fairly diversified portfolio. Balanced diversification helps you to safeguard your retirement income from the sudden market downturns. You could choose to have distributions into various asset classes, like stocks, bonds, cash equivalents, and others. You could also divide them into asset categories, such as large-, mid-, small-cap, and growth and value funds. The primary purpose of diversification is to evade the impact of market cycles by distributing assets to counterbalance volatility. Ideally, a well-diversified portfolio is more likely to outperform a concentrated one. You can seek professional advice to ensure that your portfolio can withstand market volatility without hampering your retirement income.

• Undertake active risk management

Merely investing in mutual funds or having a diversified portfolio at one time may not help you sail through a volatile phase. In such times, it is helpful to consistently manage your funds to minimize risk. The aim is to understand the movement of the market and undertake a strategy that does not compromise on the retirement goal but can help you stay put in difficult times. For this, you must understand your risk tolerance and undertake active risk management to make sure that your maximum risk limit is not exceeded. For instance, if your retirement accounts are more prone to risk because of being highly vested in assets such as equities, then the ideal strategy would be to de-risk your portfolio. You can do this by diversifying your funds into more secure holdings, such as high-rated bonds. But it is important to not make any decisions in panic. Instead, try to aim for flexibility and a dynamic portfolio that is balanced to endure market fluctuations.

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• Improve liquidity

Irrespective of an emergency fund, it is good to keep a part of your investments in cash and cash equivalents. These could include short-term bonds, treasury bills, treasury-inflation protected securities, certificates of deposits (CDs), etc. This will prove beneficial when all other methods to safeguard your retirement income fall short. Moreover, this will provide for other unexpected expenses, which cannot be covered through the contingency fund. Ideally, for people nearing retirement, keeping 5 years’ worth of expenses in cash and equivalents is recommended. This eliminates the need to withdraw from accounts that offer lower returns due to temporary market precariousness.

• Be stringent about withdrawals

This needs to be understood in two dimensions. First, if you have already retired, it is important to be cautious about your yearly withdrawals and not splurge your income. As recommended by experts, a retiree should draw only 3-5% of their funds in a year to not outlive their savings. Moreover, disciplined withdrawals ensure that you have more money to use as a reserve for situations of volatility. By balancing your withdrawals, you are well-equipped to evade the need to sell assets in financially challenging times. Alternatively, if you are saving for retirement, early withdrawals can prove to be detrimental. In volatile market conditions, it is important to opt for other sources of income rather than seek early withdrawals from 401(k) accounts, IRAs, etc. Such a strategy could attract a penalty of 10% and can hamper the value of your savings.

• Make wise investments

A significant move in times of market volatility is to make well-calculated investments. Even though it may seem unfavorable to invest more, in some cases, such investments could instead fetch higher returns. For instance, if the market movements have reduced the value of stocks, it would be ideal to buy more units at a lower price and withhold them until the market recovers. This can also be achieved by increasing your contribution percentage of retirement savings accounts. You could seek to match your employer’s contribution for accounts such as a 401(k) plan. This will provide risk-free returns when the market rises. Moreover, employers also offer 3-5% of bonus money for equal contributions.

• Have a secondary source of income

Market volatility could occur due to several reasons, such as the COVID-19 situation. The global pandemic led to a loss of more than 36 million jobs in America, up until May 2020. In such situations, it is advisable to have a reliable secondary source of income, which can help pay for your living expenses. These could include a part-time job, freelancing opportunities, online ventures, rental income, returns and interests, etc.

• Watch and act only when necessary

When markets are fluctuating, it is common for investors to panic and pull out investments to protect their retirement income. But the strategy may not be ideal for all cases. Instead, it can be more beneficial to be watchful and act only when required. Moreover, taking decisions backed by logic and not driven by emotions also helps. For plans such as an IRA or a 401(k) account, etc., it could be rewarding to remain invested and not withdraw your money. Instead, allow the volatility to pass and keep the assets in the market for as long as possible.

To sum it up

Market volatility is a recurrent phenomenon. But as an investor, it is good to create strategies that can shield you from such variabilities and ensure that your retirement income is least affected. Moreover, with guidance from professional financial advisors, you can seek to maximize opportunities even when the market is volatile.