Is your retirement plan ready for a market downturn?

We’re not in a stock market downturn right now, which could make this a time to prepare for the next one, whenever it may come. You need to be ready because — depending on its length, depth, and timing — a market setback can also set back your retirement savings, likely one of the most important resources you have.

If talk of market volatility gives you the jitters, you’re not alone. Jackson’s own research shows that investors’ top concern is how to protect their retirement savings.^* Most investors surveyed also are unwilling to take on risk and are very uncomfortable with stock market fluctuations. Here are some of what these investors — likely including you — would prefer to avoid if they could:

Stock market volatility. Even if stock market volatility isn’t the biggest risk to your portfolio, it can sure feel that way. That’s because stock market drops can be emotional as well as financial events and because they can come seemingly out of nowhere — for instance, bad economic news out of Washington, D.C., a distant outbreak of war, a disruption to oil and gas production, unexpected election results. Any of these can trigger a market drop that can feed into a bear market. And stock market volatility can impact your portfolio especially harshly if your assets don’t match the level of risk you can tolerate and the amount of time you have before retirement to bounce back from a downturn.

Global uncertainty. As mentioned, wars and other disruptive events anywhere in the world can trigger a stock market downturn. But that’s not the only way they can lead to losses in your portfolio. International supply chain disruptions can impact one or more of the industries in which you’ve invested — think rare-earth metals needed for batteries and the products, like electric cars, that use them. Also, another public health emergency could crush the economies of regions or countries where you have money invested.

Demographic changes. You’re not the only one planning to retire, of course. But have you thought about how other retirees can affect your portfolio? People ages 65 and up represented 16% of the U.S. population in 2019, and this group is expected to grow to 21.6% by 2040.¹

It’s possible that as members of this rapidly expanding demographic continue to retire and sell investments to fund retirement, it could put downward pressure on the markets. As a result, investments could underperform expectations. A similar effect could be produced as larger cohorts simultaneously sell off riskier investments to purchase more conservative ones. That could adversely affect retirees both when they sell and when they buy.²

How much risk can you live with?

That’s an array of risks that can influence your retirement plans. Many of them can be mitigated with time, money, and effort — but not all. Which risks can or should you accept? Your answers will depend on your tolerance of, and capacity for, risk.

Risk tolerance refers to how much acceptance you have for potential losses in your portfolio, and how much anxiety such losses generate. Risk capacity, on the other hand, refers to the amount of risk you can handle financially. The more financial obligations you have, the more you depend on your investments to meet them, and the sooner those obligations are due, the less risk capacity you have.³
 

Manage your risk with diversification

Managing risk doesn’t mean eliminating risk. It means diversifying your portfolio with investments at various levels of risk and reward, so together they can preserve your capital, generate steady income, and enable growth. The mix that’s right for you depends on your risk tolerance and capacity, how old you are, and how many years you have until retirement. As those numbers change over the years, so should the spread of assets — also called asset allocation — in your diversified portfolio.

There are several options that risk-averse investors can consider to help diversify their portfolios, including:

Bonds, which can offer a guaranteed return on your investment. However, their price, and thus the value of your investment, can fluctuate over time, sometimes markedly and generally in inverse relationship to the market for securities.

Annuities, which may provide protected, reliable income when you need it. They can help bridge the gap between the savings you’ve accumulated over time and traditional sources of retirement income, like Social Security. Plus, you can potentially let your savings grow tax-deferred.^†

There is an additional cost associated with optional riders for such benefits as guaranteed lifetime income. Also, annuity upside potential may be limited compared to some other financial products. However, many investors find any potential trade-offs worth the protection against various financial risks that annuities can provide.

Long-term care insurance, which helps cover costs ranging from home health aides to assisted living and skilled nursing facilities. Many people assume Medicare covers these expenses, but it doesn’t⁴. Long-term care insurance is generally less expensive the younger you are when you acquire it.⁵

To help ensure that your retirement plan is ready for a market or economic downturn, consult your financial planning professional.