Stock Market Fluctuations and Your Retirement Decisions
What’s going on with stock markets and how does this affect your retirement decisions? If you are about to retire or have recently retired, then stock market declines and high inflation are probably causing you to lose sleep.
Entering retirement represents a major shift from actively earning income to depending on your investments to fund your desired lifestyle. Down markets and high inflation may cause you to alter your retirement plans. However, most experts say that you should not let these events deter your retirement and long-term goals.
There are some steps you can take to help lessen the effects on your investments and allow you to retire more confidently.
Assess Your Retirement Income Vulnerability
Many retirees today still have the advantage of being a beneficiary of an employer defined benefit (DB) pension plan. In that case, the retirement payments are fixed and not affected by fluctuations in the markets. The spending power of these payments can be negatively impacted by inflation except where DB plan payments are indexed to inflation.
In contrast, personal registered retirement savings plans (RRSPs) and defined contribution (DC) pension plans can be affected by market fluctuations as their benefit to you in your retirement is based on the value of the investments in the plan. They continue to be affected by market fluctuations on their eventual transfer into a registered retirement income fund (RRIF) from which you will withdraw money for retirement living expenses. The amount of the allowable regular payments can be impacted by the total value of the fund on each payment date.
It is important to also assess the effects of market fluctuations and inflation on other sources of income such as rental income or interest on cash savings to determine if these can help offset the effects on your investment portfolios. In some cases, these alternative income sources may be able to supplement shortfalls from your investment portfolio.
Steps to Lessen the Effects of Stock Market Fluctuations
Having previously established a long-term investment plan as part of your retirement planning you may have had the good advice to prepare for declining markets in advance. Indeed, you will have experienced several market downturns during your lifetime before retirement and therefore they should not be a surprise to you. Such a plan usually recommends holding at least a year’s worth of expense needs in a cash or a liquid investment account.
Have A Budget
You should determine a budget so that you know how much you can withdraw from your retirement savings each year without risking that you outlast your assets. Knowing this may relieve the anxiety caused by periodic market fluctuations. Remember that negative market fluctuations are followed by positive market fluctuations. As long as you stick to your predetermined budget, you should be ok.
Try to Reduce your Spending
During periods of market declines or high inflation, try to decrease your expenses where possible. Defer any planned renovations, big ticket purchases or extended vacation trips until markets have recovered. Concentrate spending on needs rather than wants and wishes.
Your retirement planning should be a component of your long-term financial plan. That being the case it is important to stay the course. Do not react impulsively to market downturns and sell your investments – stay invested according to your long-term plan so that you will participate fully in the market recovery. Sticking to your long-term plan is key to riding out market fluctuations and allowing your retirement funds to recover.
Investing in Retirement with Bloom Investment Counsel, Inc.
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This content is provided for general informational purposes only and does not constitute financial, investment, tax, legal or accounting advice nor does it constitute an offer or solicitation to buy or sell any securities referred to. Individual circumstances and current events are critical to sound investment planning; anyone wishing to act on this content should consult with his or her financial partner or advisor.