Protect Your Savings During Market Volatility

Summary: Market volatility can significantly reduce the value of your savings and derail your retirement plans. You can protect your retirement savings from market volatility and secure your financial future by maintaining a diversified portfolio, building a cash cushion for emergencies, rebalancing regularly, and adopting income-generating strategies like dividend-paying stocks or annuities.

Market volatility can feel like a rollercoaster ride—one day, your retirement savings are soaring, and the next, they have plunged. If you’re approaching retirement age, this unpredictability can be especially unsettling.

But here’s the good news: while you can’t control the market, you can control how you prepare for it.

In times of market volatility, it’s crucial to protect your hard-earned retirement money to ensure your future remains on track. By making smart, strategic, and risk-informed moves, you can shield your 401(k), IRA, and other investments from the worst effects of a downturn and help safeguard your retirement savings.

Let’s explore how you can confidently navigate these ups and downs while keeping your financial future secure.

Maintain a diversified portfolio

When dealing with market volatility, one of the best strategies to shelter your retirement savings is diversification. Think of your retirement money like a safety net—spreading your investments across different assets helps keep that net strong, even when markets are shaky.

What is a diversified portfolio?

A diversified portfolio means investing in a mix of assets like stocks, bonds, and cash. Why? When the market is in turmoil, not all asset classes depreciate at the same rate. Stocks may experience a dip, but bonds or other investment classes might remain steady or even rise, which can help cushion your losses. If you have your retirement savings spread out, you can reduce the risk of one downturn impacting all of your assets at once.

For example, let’s say you have a mix of 60% stocks and 40% bonds. During a downturn, your stocks may decline in value, but your bonds can provide stability, helping balance out the losses. If you’re wondering how to protect a 401(k) from a market crash, this is one of the most reliable strategies. Most 401(k) and IRA accounts have several options, including  IRA investments which are less affected by market swings.

It’s also wise to diversify within each asset class. For instance, instead of putting all your retirement money into one company’s stock, spread it across different sectors like healthcare, technology, and consumer goods. This way, if one sector suffers, others may still perform well, providing more stability during market volatility.  Keep in mind using an asset allocation methodology like diversification does not guarantee greater returns or against the risk of loss in a declining market.

Build a cash cushion for emergencies

During market volatility, you don’t want to be forced to sell your investments at a loss just to cover daily expenses. So, you may want to consider a solid cash cushion. Financial professionals often recommend keeping at least one to three years’ worth of living expenses in a safe, easily accessible account, such as a savings account or money market fund.

Imagine the stock market experiencing a sudden collapse but you already have enough cash set aside to cover your living expenses for the next two years. Rather than panicking and selling off your investments, you can wait for the market to recover. This approach helps protect your retirement money and also allows your investments to claw back their value.

For those who are nearing retirement, this cash cushion is particularly important. If you’re asking — should I invest in retirement when the market is unstable? The answer depends on if you have that cash safety net in place. With a secure backup, you can confidently continue investing for the long term without worrying about short-term market dips impacting your immediate financial needs.

Rebalance regularly

During periods of market volatility, your investments can shift in unexpected ways. Stocks may drop in value while bonds remain stable, causing your original asset allocation to become unbalanced. How do you then protect your investments? The answer is rebalancing.

Rebalancing means adjusting your investments to return them to your target allocation. For example, if you originally planned for 60% of your portfolio to be in stocks and 40% in bonds, market fluctuations might shift that to 70% in stocks and 30% in bonds. This leaves you exposed to more risk than you intended. Rebalancing helps bring your portfolio back in line with your risk tolerance and retirement goals.

How does rebalancing work?

Amid market volatility, your stock investments may overperform or underperform, leaving your retirement money either too concentrated or underinvested in certain areas. Here are different ways you can rebalance your investment.

1. Selling greater-weight assets to the intended portfolio amount is a common approach to rebalancing a 401(k). Sales proceeds can then be purchased as lower-weight fund assets. As long as 401(k) money is not withdrawn from the account, this sale and purchase is permitted within the 401(k) without tax consequences.
2. Those who want to slow down rebalancing their portfolio can instead adjust future allocations. This is a less precise approach to rebalancing a 401(k) since it will be somewhat difficult to get on the exact allocation intended.

How often should you rebalance?

It is advisable to review your portfolio at least once a year and consider adjustments if your asset allocation has drifted more than 5-10% from your target. In tax-advantaged retirement accounts, like IRAs and 401(k)s, the automatic rebalancing is straightforward and often automated. However, in taxable brokerage accounts, rebalancing can trigger capital gains taxes, so it’s important to weigh the tax consequences before making changes.

Consider an income-generating strategy

You can create income in retirement by investing in dividend-paying stocks, bonds, or annuities. These strategies typically provide a steady stream of income, allowing you to avoid dipping into your principal investments when the market is down.

If you invest in high-quality preferred or common dividend-paying stocks or bonds, you may be able to generate regular income to cover expenses while potentially leaving your principal untouched. This could help you avoid depleting your investment principal during a market downturn and allow it time to recover as markets improve.

Another option is to consider purchasing an annuity. Annuities can provide guaranteed income for life, helping to reduce your reliance on more volatile assets during retirement. While they come with different options—fixed, variable, or indexed annuities, they can offer protection against both market risk and longevity risk.  Annuity guarantees are backed by the claims-paying ability of the issuer.

Take the step to help protect your retirement savings

Market volatility can pose a significant challenge to your retirement savings, but there are smart steps you can take to safeguard your financial future. It encourages a healthy mindset towards risk, reinforcing the idea that staying invested, enduring volatility and focusing on long-term goals are key to successful investing.

To help protect your savings, you should maintain a diversified portfolio, build a cash cushion for emergencies, regularly rebalance your portfolio, and adopt income-generating strategies.

If you have questions about retirement savings or need assistance tailoring these strategies to your unique situation, it is best to seek professional advice. Mutual of Omaha offers resources and advisors that can help you make informed decisions about your retirement savings. Whether you’re seeking advice on portfolio diversification, how much income your 401(k) may generate or any other aspect of retirement planning, our team of financial professionals can guide you through the process of making an informed call.

Ready to take the next step? Reach out to a Mutual of Omaha financial professional to discuss your retirement savings plans.

FAQs

Q1. Should I continue investing during periods of market volatility?

Yes, it’s generally wise to continue investing during volatile markets to take advantage of dollar-cost averaging, especially if you have a long-term goal. Staying invested allows you to benefit from market rebounds.

Q2: How can I try to reduce volatility in my investment portfolio during volatile markets?

A great way to reduce volatility during volatile times could include going for a mix of low-risk investments like bonds or dividend-paying stocks. If you’re looking for more stability, consider a conservative investment approach or fixed-income products like a bond fund or money market fund.

Q3: What is the 4% rule in retirement planning?

The 4% rule is a guideline that suggests withdrawing 4% of your portfolio in the first year of retirement and adjusting that amount for inflation in subsequent years. This strategy may help retirees avoid running out of money during a 30-year retirement period, even when facing market volatility.

Q4: How much cash should I keep on hand during retirement?

Financial professionals recommend having about 2–5 years of living expenses in high-yield savings or money market accounts. This can help you avoid selling investments at a loss during market downturns.

Disclosures:

Registered Representatives offer securities through Mutual of Omaha Investor Services, Inc., Member FINRA/SIPC. Investment Advisor Representatives offer advisory services through Mutual of Omaha Investor Services, Inc.

All investing involves risk, including the possible loss of principal, and there can be no assurance that any investment strategy will be successful.

Mutual of Omaha and its representatives do not provide tax and/or legal advice, and the information provided herein is general in nature and should not be considered tax and/or legal advice.

Not all Mutual of Omaha agents are registered representatives or financial advisors.