Retirement Planning in an Economic Downturn

There's no denying the fact that we're living in uncertain times. During these unprecedented times of a global pandemic, the market is more volatile than usual, and many people are nervous about what the future holds. This can be especially true for those who are hoping to retire soon, especially if they would be relying on investments to supplement social security income.

If you're worried about how stock market movements could impact your impending retirement, check out these frequently asked questions:

Q: Can I still retire on time?

A: Maybe. It depends on a number of factors and how the numbers look in your specific situation. Here's what you want to consider to determine if you can retire when you initially planned:

• Cash on hand. How much cash do you have in a bank account right now? You may be able to use cash savings to cover expenses instead of pulling money out of your investment accounts. That would allow you to retire when you planned, but also give your portfolio time to recover from a market dip.

• Annual expenses. Once you determine how much cash you have available to fund your lifestyle, you need to determine how much that lifestyle costs you on an annual basis. If you have two or three years' worth of expenses saved in cash, you may be able to retire on time and use this cash before you begin withdrawing more heavily from your portfolio.

• Income sources. If you have income sources beyond your portfolio, like a pension, then that can help your nest egg go farther without postponing your retirement date.

Q: What if I no longer have enough to retire because of a stock market downturn?

A: If a market downturn caused your portfolio to drop below your targeted level for retirement, it's worth evaluating if you can continue working a few more years (even if it's just part-time). This gives you a chance to earn more money both from your job and from your portfolio as the market eventually recovers.

You can also consider downsizing your home, refinancing your mortgage, or cutting back on travel and other non-essentials to help save money and reduce expenses. Depending on how important it is for you to retire now, you may even want to consider moving to an area with a lower cost of living.

Q: Should I do anything with my portfolio?

A: Typically, you don't want to make any dramatic moves with your portfolio after a market downturn already happened. It's too late to avoid the drop, so now it's time to focus on making the most of the potential for recovery.

That means staying calm and not moving everything you have to cash. That turns unrealized losses into realized ones, and eliminates the possibility of increasing the value of your investments in the future. What you can do, however, is consider rebalancing your portfolio. Rebalancing can bring your portfolio back in line with your ideal asset allocation so that you're not taking on too much risk or missing out on the advantages of proper diversification.

Q: What can I do to increase my financial stability?

A: Even if you can still retire right now, you might be seeking a little extra security in the face of an uncertain economy and potentially volatile market that continues into the second or even third years of your life after work.

If that's the case, consider extending your career slightly. Even one or two additional years of earned income can make a big difference to the viability of your plan. That's because you reduce the amount of time you need to pull from your nest egg while simultaneously giving yourself more time to save up money (held as cash) to use during the first year or two of retirement.

You can also potentially increase your income stream in retirement by delaying when you file for Social Security. Once you reach full retirement age as defined by the Social Security Administration, you can add 8% to your monthly Social Security check1 for the rest of your life for every year you delay filing for benefits (until you hit age 70).

If you continue to work while also getting tight with your budget, you'll greatly increase your financial stability. (And remember, you don't have to live lean forever. Focus on cutting costs at least for the first few years of your retirement. Then you re-evaluate your spending as the market improves over time.)

Q: How do I know if my plan still works?

A: Contacting your financial advisor is a smart step to take to ensure that you're still on track to retire despite recent market movements.

Your advisor can review your specific financial situation and help you decide if you can still retire as planned. Your advisor can also help you develop a strategic plan for withdrawing from your investment portfolio in a way that doesn't jeopardize your chances of maintaining your nest egg throughout your life.