A few months ago, you were counting down the months until you could collect your pension, leave the DROP program, and enter the next phase of life.
Now, you’re checking your deferred comp balance and wondering how you’re going to be able to retire when you planned on with everything that is going on with the stock market.
These are strange times we are living in, that’s for sure. But just because your investment account statement says you have less money does not necessarily mean you cannot retire when you want.
Don’t get me wrong, some people are underfunded from a retirement perspective. However, if you feel like you’ve done a good job preparing for retirement and the last few weeks has you reconsidering, here is what I would do if I were you:
Don’t Make Emotional Decisions.
When stocks go down and we see our balance go down with it, we have this instinct to stop the pain and what does that mean? Sell! Sell everything! Get me out while I at least have something! Right?
But when you take a step back, that doesn’t make a lot of sense.
Let’s say you put your house on the market and you list it at $200,000. The first week that it’s listed, you only get offers for $125,000. Did you just lose $75,000? No, not unless you sold your house for that price.
Same thing with stocks. Right now, the world is voting and is saying your stock market investments are worth less than they were a month ago, and that does hurt. But if you are patient with your stock investments, assuming you are also diversified, eventually they will most likely bounce back.
Build Up Safe Reserves
Prior to retirement, you need to look at your pension and other sources of income and determine how much money you will need to withdrawal from your retirement accounts to continue living your lifestyle.
After you have figured out how much money you need to withdrawal each year, you want to set yourself up so you want to walk into retirement with 3-5 years’ worth of this number invested in conservative investments (cash, fixed account, US Treasury bonds, high quality corporate bonds, etc.)
Let’s say you retire, and the stock market is getting beat up again, now you have 3-5 years of conservative investments to generate cash flow from so you do not need to sell your stocks while they are down.
Continue to Invest
If you have 3-5 years’ worth of conservative investments or you are on track for it, continue to save into a diversified stock portfolio. The fact is, it is impossible to know when the bear market will be over or when the bottom is reached.
Don’t wait for the perfect time to invest in stocks because it doesn’t exist. Either stocks are cheap, but it feels like the end of the world or stocks have already rebounded, there is hope, and less room for growth.
Don’t let short term events effect your long-term investment strategy. Stay disciplined, don’t guess, stay invested.
Let me show you what I mean:
This is an illustration for someone who walked into retirement on January the 1st of 2008 with $1,000,000 in retirement assets. This person invested 60% of his/her month in stocks, and 40% of his/her money in bonds.
This person also decided they wanted to withdrawal 4% from the portfolio each year to supplement their income.
As you can see, this person took a hit in 2008. But they stayed disciplined.
In February of 2020, this person would still have a total of $1,348,342 even after taking a $574,467 of distributions from the account over the years.
Note: all references to stocks and bonds are intended to be broad funds (i.e. stock funds or bond funds) as there is concentration risk in buying individual stocks and individual bonds.
Gregg Brant, CFP®, APMA®, MBA
Family Wealth Advisor | Contributor
Gregg is a financial planner who is passionate about helping first responders and their families navigate their financial lives with confidence. Having a spouse who is a professor in the State University System, Gregg has worked with the Florida Retirement System first-hand for his own personal financial planning.
Now Gregg is on a mission to take this knowledge and disseminate it to the people who deserve it most; our first responders.
