A trader works on the floor of the New York Stock Exchange September 15, 2008 in New York City. How To Make Money On Market Crash afternoon trading the Dow Jones Industrial Average fell over 500 points as U. Inc was selling itself to Bank of America Corp, the financial firm Lehman Brothers Holdings Inc. Chances are your retirement prospects have improved in recent years. Even if you haven’t been knocking the cover off the ball when it comes to saving, your retirement accounts have probably been growing nicely due to the double-digit annualized gains stocks have churned out over the past nine years.
But have you considered how your outlook for a secure retirement might change if this aging bull market stalls — or, worse yet, takes a big dive? Just to be clear: I’m not predicting an imminent crash. Even when valuations are stretched as they are now, stocks can still continue climbing to new highs for months or even years. And many investment analysts expect it to do just that. But it’s important to remember that forecasts aren’t certainties, and sustained run-ups like the one we’ve been experiencing at some point often end with stocks going into a deep and prolonged funk.
Which is why it’s important to give your retirement strategy a stress test of sorts while things are still going swimmingly. That way you can get a sense of how your retirement prospects might change — and what adjustments you might consider making — should the market’s sizzle turns to fizzle. Step 1: Get a fix on your asset allocation. In other words, assess how your retirement savings is divvied up between stocks, bonds, and cash. This will largely determine what will happen to your nest egg’s value if the market tanks. Don’t just guess or assume you know what your current asset mix is based on where you set it in the past.
The fact is, your portfolio could be a lot more stock heavy than you think if you haven’t been rebalancing over the years. So you want to go over your holdings individually to see how much of each is invested in stocks, bonds, and cash. And then based on that, determine what percentage of your savings overall falls into each of those categories. Step 2: Use recent downturns as a guide. No one knows what the next market setback will look like. But for the purposes of this stress test, you can turn to recent sell-offs to provide context. Of course, these figures are rough approximations.
For example, I haven’t factored in investment expenses or rebalancing. Step 3: Gauge how such a setback might affect your plans. To make that assessment, you can go to T. Enter such information as your age, income, the percentage of pay you’re saving each year, your current asset mix, the age at which you plan to retire and the current value of your nest egg. The tool will give you an estimate of the probability you’ll be able to retire on schedule.
Then substitute the current value of your nest egg with your estimate of its value after a market setback. That will let you see the extent to which your chances of achieving a secure retirement might decline. That sort of decline shouldn’t be surprising in the wake of a major market rout, and it doesn’t necessarily mean you have to take drastic action. Step 4: Figure out your best move. If you’ve still got decades to go before you retire, for example, you probably wouldn’t want to shift to a much more conservative portfolio in hopes of mitigating the effect of a market setback, as doing so would likely reduce long-term growth potential of your savings — which could lower your chances of achieving a secure retirement even more.
A more effective response would be to try to save more, especially if you’ve been slacking off and effectively relying on market gains to do a good part of your saving for you in recent years. If you’re on the verge of retiring or you’ve already retired, the aim of this exercise is to help you get an idea of how much a market slump might affect the level of annual income you can pull from your nest egg without depleting it too soon. To gauge that, use the retirement income tool to estimate a sustainable withdrawal rate based on your nest egg’s current value, and then compare that figure to the rate based on your nest egg’s projected value after a market downturn. If the amount you can safely withdraw declines significantly, one option is to scale back your stock holdings now to mitigate the effect a market crash would have on the value of your savings. But you don’t want to invest too conservatively, as doing so might make it more difficult to maintain your purchasing power over a long retirement.
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