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The coronavirus is hitting hard — not just against the health and well-being of people across the globe, but financial markets as well. Stocks are plunging. The coronavirus will undoubtedly hurt your retirement investments — if it hasn’t already. But that doesn’t mean you can’t do anything to alleviate the situation.
It seems the coronavirus is also contagious to economic markets, as the downtown continues to spread, rattling global confidence in virtually every industry. Is your retirement also contaminated? The past few weeks have been brutal for the stock market, which has been reeling in the face of Italy’s descent into a full quarantine and now President Trump has declared a Europe travel ban.
The Dow Jones has already lost over 2,000 total points this week. While many advise during a downturn to sit tight and let things stabilize, you may be at the age of retirement and don’t have the option of sitting tight if your retirement savings has also been infected with coronavirus.
As Italy’s financial crisis continues to worsen, a $500 to $800 billion bailout may be in order. The plan is to help financial markets stabilize as the lack of confidence in the Italian government and banks’ ability to meet debt obligations continues to cause more fear. The coronavirus cases seemingly jumped overnight in Germany and France, causing even more unrest.
Economists have said that the coronavirus will lead to the Italian economy contracting by 3% in the first quarter, but Eurozone nations may also follow suit.
The coronavirus has been named a pandemic due to its rapid spread. The latest blow to the markets is President Trump’s travel ban on Europe, which led to the second circuit breaker trigger in a week. This shuts down markets to control volatility for 15 minutes.
Even the US stock market is crashing. Popular stock indices — to include the Dow Jones Industrial Average — are seeing their worst days since the 2008 financial crisis. Even Google stock is predicted to tank.
Stories have been emerging about retirees dealing with the crash. Those who have been aggressively investing in ETFs may have already been wiped out, especially if they were following a risky investment plan. Is it impossible to recover? What should retirement investors plan for now?
If you have thought about selling off to gain more control, experts say that historically, markets have bounced back after previous outbreaks threatened global markets and that retirees should hold tight. However, economists have also said that people who have been more aggressive with their investments will have to change their strategy.
Your retirement — including 401ks — may not be immune to the stock market’s decline and volatility. Still, there are some things that you can do to avoid panic sell-offs, which could destroy your hard-earned portfolio.
1. This Has Happened Before: Markets Do Recover
Economists are urging investors to stay calm and avoid panic sell-offs as the market will likely turn around and stabilize. In the past, markets fully rebounded and led to amazing trade wins for investors.
While experts state that today’s economy is more vulnerable due to the current social media-driven news cycle, a pricey stock market, and tightly interconnected global supply chains, most are expecting the markets to jump back.
In essence, the stock market will likely correct itself after a short-lived downturned. If you are not returning in the next month, then you can expect the markets to recoup most of its losses by the time your retirement date rolls around.
2. You Lose Money When You Liquidate in Times Like This
That may seem obvious, but it’s important to remember how much the value of your investments has dropped. Anything you sell now would lead to an even bigger chunk of your retirement going to waste. However, some may want to liquidate in order to pay bills.
If you have another way to pay your bills right now, economists say to pay your living expenses without digging into your portfolio. That may be easier said than done, especially if you don’t have any other income, but financial planning experts say that you should lean more on Social Security and emergency savings rather than sell.
Overall, it’s not a good idea to liquidate your stocks before you retire because you need them to generate more growth in your 401(k) or IRA once your days at work are at an end.
3. What to Do: Stabilize Your Portfolio Investments
It’s time to add safer investments to your portfolio, such as bonds. These add more protection during highly volatile periods in the stock market. If you have been making riskier investments, this downturn should be a wake-up call to look at your savings and re-assess your retirement plan.
You should have a decent spread of stocks and bonds. If you have been operating with a higher tolerance for risk, you may see your faith tested even more. Instead, you should strike a 50/50 split, but it all depends on how much you rely on your investments for current income.
4. Push Back Your Retirement Date
If your portfolio has suffered huge losses in the past few weeks, you are not alone. Market volatility can be incredibly scary for anyone in retirement or with a quickly approaching retirement date. Whether you were aiming to retire next week or in a few months, you may need to consider pushing back your exit from the workplace until market conditions stabilize.
That doesn’t mean you have to delay for years or even months. The markets will jump back by summer, according to some economists. In fact, this could be an opportunity for those who sit tight and wait for the markets to recover.
5. Keep Some Money Outside of the Market
If you have already sold off or plan to liquidate certain stocks, financial advisors say that it’s best to keep some cash out of the market right now anyway. Other investors may feel the need to take advantage of stock prices falling in volatile markets, but even these investors should keep some cash aside for emergency funds.
For those nearing retirement, you should refrain from withdrawing any money from your retirement as a way to protect yourself from “sequence of returns,” which is when you withdraw from your principal. If you do plan to withdraw, it should be from your gains only. Otherwise, you can diminish your future returns by a larger amount.
6. Try Short-Term Investments
For those who have to do something now, the best thing you can do according to economists is invest in US Treasury Bills and Certificates of Deposit. For those who are returning within the next few years, you should have at least 3 years worth of expenses in cash, US Treasury, or short-tern CDs. So if you have annual expenses of $50,000, then your cash holdings should be $150,000 or greater.
In addition, annuities may also be a way to protect your investments, but guaranteed income is the best way to offset these temporary losses. If you haven’t invested with annuities before, you should talk to a financial planner about whether this is the right choice. You don’t want to invest in annuities without understanding how they work, as they are a bit complicated and have different fee schedules.
While outbreaks can be scary for markets, we have seen them bounce back quickly in the past and lead to bigger gains for some investments. What investments do you plan to keep? Have you experienced an epidemic crash before with a recovery? What’s your strategy? Let us know in the comments section below.
Image courtesy of US News and World Report.