May 14, 2020
This week, I’m sharing with you several types of stress tests that you should run on your retirement portfolio.
Today, I’m talking about the most common stress test that probably comes to mind when you think about a stress test on your retirement or your investment portfolio, and unfortunately, it’s also the only kind of stress test that anyone ever bothers to run on their retirement. And that is the bear market meltdown stress test.
What happens to your retirement if your investment portfolio loses 25, 30, or 35%? A big bear market loss, especially in the first few years of retirement can be devastating.
The most important thing you can do is understand your risk of a big portfolio loss. The more in stocks you have, the more susceptible you are to this risk, but it’s a balance because while you need to protect yourself from the roller coaster of the stock market, you need to have enough in stocks to provide growth to keep up with your withdrawals and the continued cost of living increases in retirement from inflation.
Another way you can protect yourself is to have enough in cash so you can suspend your withdrawals for 6, 12, or 18 months and let your portfolio recover.
The good news about this type of stress test is that it’s one of the easiest to calculate. If you have $1,000,000 at retirement, but 2 years later it drops 25% and you have $750,000 and it takes a few years to recover the loss, can you make adjustments to preserve what you have. What would you be willing to do? Go back to work part time? Reduce your spending? The danger with a bear market drop is that your withdrawals from your investments make the losses worse and can cause permanent damage, making it more difficult if not impossible for your investments to recover to their previous value.
That’s it for today. Thanks for listening. My name is Ashley Micciche and this is the One Minute Retirement Tip.
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