I’m 57 with $285,000 in a brokerage account, and about the same amount in retirement accounts. I am currently maxing out the amount I can put into my employer’s retirement plan.
However, as the market continues to decline, I am wondering if I should hold in more cash. I understand that with the market going down I am essentially buying shares “on sale”. But if the price keeps on falling it will not take me long to recover the loss due to my age. thought?
It depends on what you mean by “keep more in the cash”. It’s painful to see money fading out of your investment accounts. This is especially true when retirement is finally in sight – although these days, “Should I cash out?” There is a question I have been getting from readers of all ages. But unless you are facing a dire need, I would not cash in on the investment right now.
The most obvious reason is that the stock market is down about 20% year over year as of the end of October 2022. Your fear is that you will not be able to recover your losses. But by the time you sell, the losses you’ve already incurred exist only on paper. Should you cash out now, you are guaranteed that your investments will never rebound.
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An under-discussed reason is that too much of your retirement savings runs the risk of being held in cash. People approaching retirement often worry that an accident could derail all their careful planning, and rightly so. But at 57, you could have easily lived three or four more decades.
Even after you retire, you need your money to earn money. If a large portion of your retirement money is in cash or other low-risk, low-return investments, you may need to withdraw significantly more from your earnings. At that point, running out of money becomes a real concern.
Saving more cash is a great goal. That way, you have a cushion for your retirement years. The worst case scenario is a prolonged bear market that hits after you retire. If you don’t have liquid savings and are living off your investments, a recession is a financial nightmare. You are forced to withdraw from expired investments that never get a chance to rebound.
While you’re still working, you generally want at least three to six months of liquid savings on hand. But when you are preparing for retirement, you should increase this goal. Ideally, you would have two or three years of savings. This may not be realistic for many people, but the extra cash you can save provides a valuable buffer.
If you have a decent amount of spendable income, you can try scaling back on non-essentials to build your cash savings and keep investing as usual. But if that’s not an option, I’d keep maximizing your contributions to your employer-sponsored plan to milk tax benefits and invest less in your brokerage account.
It’s also worth meeting with a financial advisor to review your asset allocation, even if it’s just a one-time engagement. You probably don’t want to do significant rebalancing while the market is still down. But you can devise a strategy to move your money to safer assets once the market corrects.
Keep in mind that investing is only one part of retirement planning. A little flexibility can go a long way. For example, if you’re in good health and your job is stable, you may want to work a little longer than you planned. This gives your money more time to rebound. Plus, it can help you hold out for more Social Security, which can help fill the void when the stock market goes down.
Even though it is scary when the stock market becomes a threat to your retirement, it helps to put things in perspective. The average bear market – defined as a decline of 20% or more from peak to bottom – lasts less than 10 months. More importantly, the stock market has always made a comeback from its losses. So try to ignore the daily fluctuations in your 401(k) balance and instead check in once a month or quarter.
Perhaps the hardest part of protecting your retirement savings is that we naturally want to take action when the market is down. But this is exactly the opposite of what we should be doing. When things go bad, it’s best to do things by hand. Again, you need the discipline to act when the market is strong, rebalancing or selling, even if it means foregoing potential returns.
Don’t take any big step on the basis of latest stock market news. But aim to save more cash gradually while continuing to invest. The stock market can be a scary place to put your money in in the short term. But in the long run, it is a very reliable generator of wealth.
Robin Hartill is a certified financial planner and a senior writer at The Penny Hoarder. Submit your tricky questions about money here [email protected],
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