The stock market has been turbulent this year, and the S&P 500 it is down almost 20% from its peak in early January, approaching bear market territory once again this year.
Many investors are also worried about a possible recession, adding to the concerns of the stock market. With all this volatility, is it still safe to withdraw right now? Or should I wait a few years? It depends on some factors.
1. Is your asset allocation appropriate for your age?
Asset allocation refers to how your investments in your portfolio are divided.
When you’re younger, it’s usually best to invest primarily in stocks, allocating little money to bonds and other conservative investments. While stocks carry higher risk than bonds, they also earn higher returns, on average. And if the stock market falls, you have plenty of time to let your investments recover.
However, as you age, your portfolio should lean toward the conservative side, more heavily allocated to bonds and less to stocks. Bonds generally earn lower returns than stocks, but are also less affected by market volatility.
There is no set rule as to what your asset allocation should look like. However, a general 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. If you’re 65, for example, you might aim to allocate 45% of your portfolio to stocks and 55% to bonds.
2. How strong are your savings?
If your savings are running short, it may be harder to retire. Even with proper asset allocation, your retirement fund could still lose value in the short term if the market is in a downturn.
This is normal and not something to worry too much about as the market is likely to recover eventually. However, sometimes it can take years for the market to fully recover from a downturn. If your savings are thin to begin with and a recession further depletes your retirement fund, your early years of retirement could be more difficult.
The amount you should save for retirement will depend on your particular situation. But your savings may need to last 20 years or more, so before you retire, it’s wise to realistically assess whether you’re on the right track.
3. How much can you depend on Social Security?
Social Security benefits can go a long way toward closing the gap between what you’ve saved and what you need to retire comfortably.
If you haven’t already, now is a good time to check your benefit amount online. You can do this by creating a mySocialSecurity accountwhere you will see an estimate of your benefit amount based on your actual earnings throughout your career.
Keep in mind that this is the amount you’ll be paid at your full retirement age (FRA). If you file with your FRA (at age 62), your payments will be lower. On the other hand, if you delay Social Security beyond your FRA (until age 70), you’ll get bigger checks each month.
Social Security can be an important source of income in retirement, and your checks won’t be affected by fluctuations in the stock market. Depending on how much you’re receiving, your benefits may make it easier to retire during periods of market volatility.
Market turmoil can be intimidating, but that doesn’t mean you can’t back out. By taking a few extra precautions to make sure you’re ready, you can head into retirement as prepared as possible.