How to Recover from a Market Crash if You're Retired
About the author: Lamar Watson, CFP®, is a Fee-Only Financial Advisor in the Washington, D.C. area, that works with clients virtually across the country. Lamar's work with his clients focuses on budgeting, employee benefits, paying down debt, buying their first home, and investing. Lamar is the Founder of Dream Financial Planning, a virtual financial planning firm specifically designed to help young professionals and minorities take control of their finances and fulfill their dreams. Feel free to schedule a complimentary consultation to learn how we use the The DREAM Financial Planning Process ™ to help our clients achieve their goals.
Between Feb 20 and March 23 of this year, the markets experienced a 30 percent drop. While they have recovered somewhat since then, the volatility may not be over. Retirement accounts like 401(k)s and IRAs may be at a lower value than they were just a few months ago, savings accounts are generating less interest, and the ups and downs are leaving investors nervous.
But for those already retired, there’s a good chance you might be feeling even more concerned about recent market volatility than others. With this general economic upset, the question becomes: what should you be doing next? Below we are discussing four things you could be doing now to help recover from a market crash.
#1: Review Your Financial Plan
Many of us are emotional about our money, and we can’t help it. That’s why working with an advisor who can offer an objective, logical approach to money management is often a necessary component in reaching our financial goals.
Watching the market crash, or seeing our stocks drop overnight, can cause panic - and understandably so. The first thing to do when faced head-on with a market downturn is to pause, take a breath and review the financial plan you and your advisor already have set in place.
Often times, advisors develop financial plans or investment strategies that prepare for the unexpected - whether it’s a market downturn, death in the family, loss of a job, etc. Turning to your advisor and reviewing your plan amidst a market crash can be a comforting first step in remembering not all is lost. Doing so can serve as a reminder that now is not the time to make hasty, emotionally-driven decisions. Rather, now is the time to focus on your personal economy and what you can do to rebuild or reallocate what you need throughout retirement.
#2: Decide Whether or Not to Continue Investing
You’ll likely want to talk with your advisor about whether or not continuing to invest in the market is in your retirement’s best interest. Pulling out now may be your first instinct, but your advisor very well may advise against it. That’s because, depending on your circumstances, jumping ship too early could prevent you from recouping any losses, should the market change.
While history is no guarantee of future performance, historically bear markets do recover. If you have the flexibility (and years) to do so, you may be advised to ride the downward trend out in hopes that you can recoup your losses when the market eventually stabilizes and begins to add gains. Again, this decision is one that should be made with a trusted financial partner, and in tandem with the rest of your retirement income strategy.
#3: Rebalance And Reassess Your Risk
A market crash can serve as a true indication of your risk tolerance, meaning this could be an ideal opportunity to reassess your personal tolerance for risk. If you’re allocating assets in a similar manner as you were while working full-time, for example, you may find that rebalancing your portfolio is well past-due.
Alongside your financial advisor, look closely at your portfolio, specifically at the balance between stocks and bonds. At a time like this, it may be tempting to change your asset allocation in favor of more fixed income. And while that may be the right option, you want to be logical and confident in this decision, as removing risk altogether could mean missing out on crucial returns later down the line. As is true for most portfolios, yours is likely to contain a mix of fixed income and stocks.
#4: Adjust Your Budget
You can’t control the market, but you can control other aspects of your financial life - including your spending and saving strategies. If you need to, take a look at your weekly or monthly budget and see where adjustments can be made. You don’t want to pull from your investments and/or sell your assets if minor lifestyle changes will suffice. Whether that means eating out less or reducing the number of trips you budget for each year, evaluate ways in which you can reallocate “fun” money to cover necessities. And as you do, remember to include contributing to your savings account or emergency fund as a top priority.
When a market crash occurs, it can feel like the future of your finances is out of your control. But with a financial partner by your side, these steps can provide both a well-thought-out plan and peace of mind for your retirement.
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Whether you're managing student loan debt, starting a business, or considering buying your first home, the DREAM Financial Planning Process™ is tailored to the unique needs of busy professionals is their 30s and 40s. This process focuses more on short-term goals while you grow and evolve in your personal and professional life. If you're looking for guidance on: Financial Planning, optimizing employee benefits, budgeting, student loans, and managing your 401k or investments we can help.
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With uncertainty surrounding the economic stability of our country, it's okay to have fears and anxieties surrounding your own savings and investments. The most productive course of action from here is to reach out to Dream Financial Planning (or whoever your trusted advisor might be) and discuss your options. It's easy to have knee-jerk reactions when it feels like the bottom is falling out, but it is imperative to make decisions using research-backed data and a level head. If you'd like a Complimentary Review and risk assessment of your investment portfolio feel free to send me an e-mail.
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