Month: December 2017

What’s the worst that could happen when you’re planning your retirement? For many, it’s the prospect of working and saving hard in their 20s to 50s, only to have a major market decline hit just as they’re finally retiring.

An extreme market event is no fun for anyone, but its impact on a 62-year-old is completely different from its effect on a 30-year-old.

When you’re older, and the market declines dramatically, it can erode decades of your retirement savings and totally alter your lifestyle in retirement. It may even prevent you from retiring when you had planned.

Such an event is not hypothetical. Consider the 2008 financial crisis. According to a study by Pew Research Center, one-third of those age 62 and older delayed their retirement as a result of its impact.

Lasting effect

CNBC reports on one concept developed by Prudential Retirement Services called the “Retirement Red Zone.” In the article, Srinivas Reddy, senior vice president at Prudential Retirement, notes: “The 10 years leading up to retirement and the 10 years after are all risky…. But the five years when you retire are among the riskiest.” Bad investment performance in this “zone” can have a significant – and likely permanent – impact on a retired/retiring individual’s portfolio.

One option to protect your nest egg during the red zone years is called “de-risking”-reducing your exposure to stocks and allocating more to less volatile asset classes such as fixed income investments.

Bonds are typically less risky than stocks. (In fact, they have not declined by 10% or more during any calendar year since 1926.) In fact, bonds as a de-risking strategy during the 2008 stock-market correction would have preserved wealth for those in the red zone.

De-risking doesn’t mean removing all equity risk; equities play an important role by facilitating growth. Your advisor can help you determine the best allocation for you.

Baby boomers preparing to retire – many of whom lack the savings to do so – may want to review basic ways of “paying yourself first.” For many years, financial professionals have recommended that everyone increase their savings for retirement. And this is one of the best ways to do it.

The concept of paying yourself first makes sense: the idea is that your retirement comes first. Before paying your bills, set aside a portion of your income and move it to a savings account or retirement plan.

Automatic deductions

It’s especially easy if you arrange for money to be automatically deducted from your paycheck and moved into accounts set aside for emergency savings or retirement. Because you never “see” the money in your checking account, you won’t be tempted to spend it.

Maximize 401(k) contributions

You also can maximize contributions to your 401(k) plan. At first it may seem daunting to set aside 10% or 15% of your income. But look at it another way: Can’t you live on 85% or 90% of your income? Plus, that hit isn’t as big as it may seem: it’s coming from pretax money.

Shift gears

Finally, change your mind-set. Initially, it may seem as if you have less money at your disposal, so you’ll need to adapt your spending habits to match this somewhat lower income. However, after a while, it will feel less like a sacrifice – and you’ll have the peace of mind that comes from knowing you are preparing yourself and your loved ones for a comfortable lifestyle in retirement.