I’m retired and living on Social Security and food stamps. I have all my money in two conservative retirement accounts. I cannot contribute any money to them. I plan on taking distributions in five years. What’s the best course of action to save my money before the market crashes even more?
The core question here is how to protect your money during a market downturn. It’s one that I hear perhaps more than any other.
The answer can vary depending on the unique circumstances of the person asking. In particular, it depends on how you understand risk and what you’re willing to do about it.
Here’s what to know about protecting your money when the market falls.
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The Investor’s Trilemma: Safety, Liquidity and Growth
In general, your investments can offer safety, growth and liquidity. But you can’t expect them to deliver all three benefits at once. Since you do not plan on taking distributions for another five years, liquidity probably isn’t a top priority right now. (Of course, it is still important to keep in mind.) That leaves safety and growth as your primary concerns. So, which of those two is more important?
In your case, it’s clear that safety – or avoiding loss from further market downturns – is a major concern. You don’t have extra cash to put toward your investments, and the fact that they’re already so conservative suggests that you don’t think they can take much of a hit.
You may or may not be right to think that. It’s difficult to say without looking at the hard numbers. And there may be steps you can take to make your portfolio more conservative. On the other hand, perhaps your dissatisfaction indicates that a safety-first approach is no longer cutting it.
The Challenge: Beating Inflation
The reason to invest in the first place is to maximize the value of your money as much as possible. Many obstacles get in the way of that goal. But the one hurdle that will always be there, to some degree, is inflation.
So, as an investor, your battle is with inflation first. And the only way to win that battle is to own something that appreciates in value faster than (or at least equal to) the inflation rate.
Can You Earn Returns Without Risk?
With all those principles established, let’s return to the central question: How can you avoid putting your money at risk but still earn returns on it?
Well, sadly, the short answer is that you can’t. No risk typically means no return.
That said, you can get minimal returns, for minimal risk, by investing in debt. In other words, you loan somebody money and get paid a little bit of interest in return. Some examples include:
Certificates of deposit. These financial vehicles are currently paying about 3% for 12-month terms. Your money will be held in the CD until the maturity date or else you’ll owe a penalty.
Money markets. These savings accounts are paying about 1.5% today.
Treasury bonds. These government-backed bonds currently pay about 3.1% for a two-year bond.
Treasury Inflation-Protected Securities (TIPS). This type of Treasury bond has a principal value determined by the prevailing inflation rate, which impacts the interest paid.
I bonds. This Treasury bond’s interest rate is determined by the current inflation rate. The current interest rate for I bonds is at 9.62%.
These investments will not earn you much money. But they will help soften the blow of inflation and won’t vary wildly in their value.
Such modest benefits are enough for some investors. But they may not be enough for you.
How to Approach Your Investments
Sure, you don’t have the income to spare right now, and you won’t start drawing from your portfolio for a few more years, so hunkering down with low-risk assets sounds appealing.
But “starting” to draw from your portfolio is very different from depleting it. How long do those savings need to last? If you plan on drawing from your portfolio over the next 20 years, you must have some exposure to risk if it is to keep up with (or beat) inflation.
The good news is getting that exposure may not be as scary as it seems. If you have a long time horizon and can get away with annual withdrawals of about 4% or less, you may be able to get your portfolio to a good place with just moderate risk exposure.
A well-diversified portfolio, for example, can have “buckets” of money with different risk profiles for various time horizons. You could have a roughly 25% portion in your nest egg invested in cash and bonds for short-term withdrawals.
A second quarter could go toward high-yield bonds and stocks and have a time horizon of six to 10 years. The final half would be in the most aggressive “bucket,” with stock and real estate holdings. You wouldn’t plan to draw from this bucket until 11 or more years have passed.
What to Do Next
As I always tell my clients, you do not flip a switch from aggressive to conservative or vice-versa. It happens incrementally over many years, even decades.
And that’s true of investing generally: Whether things look exhilarating or terrifying at any given moment, remember that it’s about the long game. Success has more to do with sticking to your principles over time, and less with picking the “right” horse at the “right” time.
Retirement Planning Tips
Work with a professional. From Social Security and alternative income streams to medical expenses and long-term care, there’s a lot to consider when creating a plan for retirement. A financial advisor can help guide you through this complicated process. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
Why you shouldn’t panic during a bear market. Pausing investments during a bear market can slash retirement income down the road. This chart shows why you shouldn’t stop investing during a bear market.
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