The stock market has been turbulent this year, and the S&P500 is down almost 20% from its peak in early January – once again approaching the bear market this year.
Many investors are also worried about a possible recession, adding to stock market concerns. With all this volatility, is it still safe to retire now? Or should you wait a few years? It depends on a few factors.
1. Is your asset allocation adapted to your age?
Asset allocation refers to how your investments are spread across your portfolio.
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When you’re younger, it’s usually best to invest primarily in stocks, with little money allocated to bonds and other conservative investments. Although stocks carry higher risk than bonds, they also offer higher returns, on average. And if the stock market falls, you have plenty of time to let your investments recover.
As you age, however, your portfolio should lean towards the conservative side, more heavily allocated to bonds and less to stocks. Bonds generally have lower yields than stocks, but they are also less affected by market volatility.
There is no set rule as to what your asset allocation should look like. A general rule of thumb, however, is to subtract your age from 110, and the result is the percentage of your portfolio that should be allocated to stocks. If you’re 65, for example, you can aim to allocate 45% of your portfolio to stocks and 55% to bonds.
2. How strong are your savings?
If your savings are insufficient, it may be more difficult to retire. Even with a good asset allocation, your retirement fund could still lose value in the short term if the market is down.
This is normal and not to be overly concerned as the market will likely rebound eventually. However, it sometimes takes years for the market to fully recover from a downturn. If your savings are scarce initially and a downturn further depletes your retirement fund, your early retirement years could be more difficult.
The amount you should save for your retirement will depend on your particular situation. But your savings may need to last 20 years or more, so before you retire, it’s wise to realistically consider whether you’re on the right track.
3. How much can you depend on Social Security?
Social Security benefits can go a long way toward bridging the gap between what you’ve saved and what you need to retire comfortably.
If you haven’t already, now is the perfect time to check your benefit amounts online. You can do this by creating a mySocialSecurity account, where you will see an estimate of your benefit amount based on your actual earnings throughout your career.
Keep in mind that this is the amount you will receive at full retirement age (FRA). If you file before your FRA (from age 62), your payments will be smaller. On the other hand, if you delay Social Security beyond your FRA (until age 70), you will receive larger checks each month.
Social Security can be an important source of income in retirement, and your checks won’t be affected by stock market fluctuations. Depending on the amount you receive, your benefits can make retirement easier during periods of market volatility.
Market turbulence can be daunting, but that doesn’t mean you can’t retire. By taking a few extra precautions to make sure you’re prepared, you can approach retirement as prepared as possible.
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