How Will a Market Crash Affect Your Retirement?

There are a lot of uncertainties in the world right now, and uncertainty sometimes translates to more volatility within the stock market. The last couple of months have been more turbulent, with the S&P 500 down roughly 10% and the Nasdaq falling nearly 16% since the beginning of the year.

While nobody can say for certain what will happen with the market, some investors worry that a crash could be on the horizon. If the market takes a turn for the worse, what does that mean for your retirement savings?

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Just how likely is a market crash?

The stock market is unpredictable, so it’s impossible to predict exactly how it will perform in the future. Though there are factors that could contribute to more volatility (such as the war in Ukraine, rising inflation, and continued supply-chain issues), there are no guarantees that they will impact stock prices.

Case in point: When the stock market plummeted in the early stages of the COVID-19 pandemic, many expected we’d experience a prolonged bear market. Instead, the market almost immediately rebounded and has thrived over the last two years.

This doesn’t necessarily mean that a market crash won’t happen. But this recent uncertainty also doesn’t guarantee that it will.

While nobody knows what will happen with the market, it’s still wise to prepare for a downturn just in case — especially if you’re retired or are nearing retirement. And there are a few steps you can take to ensure you’re ready.

1. Diversify your portfolio

First, make sure your portfolio is well-diversified. This means investing in a wide variety of stocks across multiple industries. In other words, avoid putting too many eggs in one basket.

Not all stocks may survive a market downturn, but most will. When you’re well-diversified, there’s a much better chance that your entire portfolio will pull through, even if a few stocks don’t perform well.

2. Double-check your asset allocation

As you get older, your investments will likely get more conservative as you may move away from stocks and opt for more bonds and other safer investments. This way, if stock prices fall, it won’t have as much of an impact on your portfolio.

There’s no set rule as to how much you should invest in stocks versus bonds, but a good rule of thumb is to subtract your age from 110, and the result is the percentage of your portfolio that should be allocated to stocks. For example, if you’re 65 years old, you may allocate around 45% of your portfolio to stocks and 55% to bonds.

Keep in mind that this is just a rough guideline, and your individual asset allocation will depend largely on your tolerance for risk and individual preferences. In general, though, the older you are, the more conservative your portfolio should be.

3. Keep a long-term outlook

Finally, although market downturns can be intimidating, they are temporary. Historically, the stock market has always recovered from every correction and crash it’s experienced, and there’s a very good chance it will rebound from future downturns, as well.

If the market crashes again, nobody knows how severe it will be or how long it might last. But by staying focused on the long term and trying not to get hung up on short-term market movements, it will be easier to weather the storm.

Stock market volatility can be unnerving, especially if you’re close to retirement. But by taking a few steps to prepare and maintaining a long-term outlook, you can rest easier knowing you’re ready for whatever may happen.

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