You’ve seen the news. COVID-19 is still taking its toll, to the extent that several states are closing up bars and restaurants, once again. You’re right to worry about how a second wave might affect your retirement savings and what steps you should take to protect your assets.
Your next move mostly depends on when you’re targeting retirement. The old rule of thumb is not to invest funds you need within the next five years. Between 2010 and 2019, you might have kicked yourself for following that rule and leaving investment earnings on the table. But today’s uncertain economic outlook warrants a conservative approach.
If you’re on track to retire soon
If you plan to retire within five years and you’ve reached your targeted savings goals, now is the time to consider cashing out some of your riskier investments. The S&P 500 index, largely considered a proxy for the market as a whole, is only down 5% on the year as of the end of June. That should mean you can liquidate some of your positions without incurring huge losses.
Don’t sell off your entire portfolio, though. At most, you could liquidate funds you expect to need before 2025. If you plan to retire in three years and your job outlook is fairly stable, for example, you could set aside two years of income in cash. And remember to consider your Social Security benefit when calculating the income you need from your savings.
Drop that cash into a high-yield savings account and you’ll earn about 1% to 1.5% on the balance. You might miss out on some profits with this approach, but another round of market volatility won’t wipe you out, either. It’s a fair trade-off.
If you haven’t saved enough
If retirement is just around the corner and you haven’t saved enough, you may benefit from a different approach. Instead of moving into cash, trade out your riskier positions for more stable equities and equity funds. Doing so keeps you in the hunt for gains but should reduce volatility.
Your riskier positions are small-cap funds, mid-cap funds, penny stocks, shares you bought because you liked the company’s name, and international equities. Reduce these in favor of established companies that have a record of paying dividends through all economic cycles. In terms of stock market sectors, consumer staples, mass retailers that sell consumer staples, healthcare, and utilities tend to be more resilient through recessions.
Even better, take a diversified approach and seek out large-cap mutual funds and ETFs. Sustainable funds, also known as ESG funds, are another option, as these have performed well during recent downturns. Remember to choose funds with low expense ratios, since a fund’s expenses directly impact your returns.
Know that holding more than 60% equities in your portfolio can be risky when you’re retiring soon. You’ll benefit if the economy recovers sooner rather than later but do worse if the recession drags on. Don’t proceed with holding a high percentage of stocks unless you have a backup plan or the flexibility to delay retirement if that becomes necessary.
If retirement is more than five years away
If your retirement is more than five years away, you have time to ride out this recession and all of its craziness. The only adjustments you need to make are those that’ll keep you from panicking in a market downturn. That might mean shifting to higher-quality equities or increasing your bond holdings if you’re overweighted in stocks.
You can use the Rule of 110 to assess the split between stocks and bonds in your portfolio. Simply subtract your age from 110 and the result is the percentage of your portfolio that should be in stocks. At age 40, for example, you’d hold 70% stocks and 30% bonds. That composition strikes a reasonable balance between growth opportunity and volatility, given that retirement is 20-plus years away.
Respect your timeline and risk tolerance
Ultimately, your retirement timeline and risk tolerance should guide the actions you take in your portfolio to protect against a second wave. If retirement is near, or you have a tendency to panic in recessions, you can limit your exposure to value losses by increasing your cash or bond holdings.
Those actions also limit your growth potential, however. The right move is the one that protects the funds you’ll need over the next few years, while retaining some growth opportunity over the long term.