By Scott Gamm
NEW YORK — The whiplash seen in stocks over the last week means your retirement savings strategy needs a little extra care.
If you’re still searching for a strategy or the markets meltdown makes you a wary of your current plan, here are three ways to bulletproof your retirement savings:
1. Dollar cost averaging. Dollar cost averaging is a classic technique. It simply involves contributing a fixed amount of money into a retirement account.
When stocks rise, so does your wealth. But when stocks drop, your money is able to scoop up more shares for less.
“You get different bites at the market at different prices,” said Tom Mingone of New York-based Capital Management Group.
You may not have a lump sum of money to throw into the markets, but you may have a few hundred dollars each month to invest.
“Plus, most people suffer from inertia, and with dollar cost averaging, your investments are on autopilot and before you know it, the money you’re investing becomes another bill that you’re used to paying,” Mingone added.
If you have a 401(k) account, chances are you’re already employing dollar cost averaging.
“Most have a 401(k) plan through an employer that invests on a consistent basis,” said Grant Engelbart, portfolio manager at CLS Investments based in Omaha, Nebraska.
But Engelbart said fixed monthly amounts of money can also be contributed each month to a Roth or Traditional IRA, which you may also have in addition to a 401(k). “Sticking with that investment plan will ensure that you are both taking advantage of market selloffs and participating in strong, trending markets,” he added.
2. Target-date funds. Albeit generic, target-date funds account for one key part of any retirement investing plan: time.
Target-date funds start out heavily exposed to stocks and as you near retirement, the balance shifts to bonds, which are considered safer and less volatile than equities.
The thinking is, as you near retirement, you have less time to recoup potential losses in the stock market.
But not all target-date funds are created equal. If you’re buying target-date funds on your own, make sure you know what the balance between stocks and bonds is, especially as you get older.
“Some target date funds have more exposure to equities than others — to hedge against inflation,” Mingone said. “So you could be in your 60s and have a pretty significant exposure to stocks, which might be concerning to some people.”
He said it wouldn’t be out of the ordinary to have a 50 to 60 percent exposure to stocks while you’re in retirement.
This is because people are living longer and calibrating your investments until age 65 (or whenever you stop working and enter retirement) may not be plausible if you live until 85 or 90.
“We like when people invest during their retirement, so they ensure they don’t outlive their money,” Mingone added.
A caveat with target date funds: interest rates. Interest rates have been at record low levels since the recession but are bound to rise again. Higher rates threaten bond values, as rates and prices move in opposite directions.
3. Keeping up with costs. A guarantee is a good thing — especially in retirement.
Instead of relying on the interest generated from the principal of your investment portfolio, try to fund your monthly expenses from as much guaranteed income as possible. This could be from Social Security or a pension – sources that don’t drop in value should the stock market crash.
But with fears Social Security is running on empty and pensions hard to come by these days, there is a way to keep your income afloat, even if stocks drop.
“If you own bonds that don’t default and dividend stocks that pay income, even if a stock loses 30 percent of its value, you’re still upset, but it won’t change how you’re living in that moment in time,” said Rick Salus, senior vice president and investment officer at St. Louis-based Wells Fargo Advisors.
Companies like utility Southern Company (SO) and Kimberly-Clark (KMB) actually raised its dividends during the 2008 recession, a time of unprecedented volatility and uncertainty.
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