Retirement Planning in an Economic Downturn

There's no denying the fact that we're living in uncertain times. 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 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 withdrawing more heavily from your portfolio.

• Income sources. If you have income sources beyond your portfolio, like a pension, then that can help the 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 has already happened — or during a period of intense volatility. Instead, 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.

Once the market has settled down, talk with a trusted financial advisor about whether a 1/3, 1/3, 1/3 investing strategy would make sense. With this strategy, you have roughly 1/3 of your assets in cash and cash equivalents (money market accounts, CDs, U.S. Treasuries, etc.), 1/3 in marketable securities (stocks, bonds, mutual funds, ETFs) and 1/3 in non-traditional assets (e.g., real estate, commodities, precious metals). Because a strategy like this offers even more diversification than just stocks and bonds, it could help you better weather a variety of economic factors.

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 a 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 check for the rest of your life for every year you delay filing for benefits (until you hit age 70).1 This is compared to what you would've gotten if you filed when you were of full retirement age (67 for those born in 1960 or later).

Conversely, let's say you were planning on retiring earlier than age 67. You could still file for social security as young as age 62, but your monthly payments will be lower for the rest of your life. The reduction formula (compared to retiring at age 67) is rather complicated.2 While the exact calculation varies with every month you delay retirement, the AARP breaks it down in one-year increments so you can see the impact of filing for Social Security benefits at different ages:3

• Age 62: 30% reduction
• Age 63: 25% reduction
• Age 64: 20% reduction
• Age 65: 13.3% reduction
• Age 66: 6.7% reduction

Even if you're older than 70, there are financial benefits to continuing to work that go beyond just the extra income you'd make and the delay in tapping into your nest egg. Most significant is the ability to continue contributing to a tax-advantaged retirement fund, regardless of age, during any year in which you have taxable earned income.4 In the past, you lost the ability to contribute to a tax-advantaged account after the age of 70.5.

In addition, the minimum age for taking requirement minimum distributions from your retirement savings accounts is now age 73. The longer you delay retiring, the longer these tax-deferred assets can grow.5

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.