How to Keep Your Retirement Savings Safe When Markets Run Hot
By Brian Famigletti, Managing Director & Head of Marketing
The Complacency Trap
A bull run may stoke optimism for investors, but for pre-retirees, it also raises a pressing question: how do you keep your retirement savings safe?
The S&P 500 recovered from its nosedive this spring, and at the time of writing, hovers near record highs. But some experts caution that record stock market gains can tempt overconfidence. And that’s not to mention the inherent risk that valuations won’t rise forever, and could slide into a downturn.
Below, we’ll explore the steps you can take today to protect your nest egg while the market is running hot.
Strength Now, Shortfalls Later?
Several studies have found that Americans spend nearly as much in retirement as they did while working — within the 93-97% range on average, per Wall Street Journal reporting.
It’s safe to say high-net-worth individuals could easily spend more in their golden years, as they maintain or even scale their lifestyle, looking to fully enjoy the perks of being job-free. It’s important to keep this in mind when determining how much you’ll need to save before retiring.
It’s also key to remain realistic about future market trends. Investors may be seeing a boost in their portfolios right now. But J.P. Morgan advised last fall that the S&P 500’s average calendar-year return could dwindle over the next decade to 5.7% — roughly half of what’s been seen since the end of World War II.
And, while past performance is never predictive of future results, historical data suggest that valuations should eventually return to the mean. In other words, higher stock prices today could potentially give way to lower returns in the future.
How Can You Protect Your Nest Egg?
To keep your retirement savings safe from a potential market correction, the best advice may be the most trite: save more.
In conversation with the WSJ, retirement researcher William Bernstein argued that most retirees underestimate how long and how much to save, given the stock market’s propensity for high highs and low lows.
If a portfolio earns just 5% per year (at an annualized, inflation-adjusted rate), investors would need to save more than 10% of their pre-tax income for 30 years to spend sustainably through a three-decade retirement, according to Bernstein.
He also found that, in nearly 1 in 5 30-year periods (lagged monthly) since 1793, stocks gained less than 4% on average. In other words, the data suggest that saving a double-digit percentage of your income for most of your working life is the best way to protect your nest egg from stock market volatility.
That might help illustrate why experts consistently advise pre-retirees to max out 401(k) contributions — even amid hot markets, when it might be tempting to curtail contributions in favor of direct investing.
Downturns are as impossible to predict as they are inevitable. It’s simply the stock market’s cyclical nature. But unchecked optimism can be as unwise as trying to time the market. Whether the times are bullish or bearish, the best course is typically a steady one.
Be sure to regularly meet with your financial advisor, who can address how market volatility might affect your retirement savings. Contact Griffin Asset Management and speak with an expert today.
Sources:
WSJ: How to Keep This Hot Stock Market From Melting Your Retirement Dreams
Reuters: Barclays, Deutsche Bank raise S&P 500 forecasts as bull run continues
Morningstar: Investors should brace for lower stock-market returns over the next decade, JPMorgan warns
Edelman Financial Engines: How to rebalance a portfolio
SmartAsset: How to Protect Your 401(k) From a Stock Market Crash
