I’m retired and live off welfare and food stamps. I have all my money in two conservative retirement accounts. I cannot contribute any money to them. I plan to get distributions in five years. What is the best course of action to save my money before the market crashes more?
-Camile
The core question here is how to protect your money during market downturns. It’s one thing that I hear probably more than anything else.
The answer may vary depending on the special circumstances of the asker. In particular, it depends on how you understand the risk and what you are willing to do with it.
Here’s what to know about protecting your money when the market drops. A financial advisor can help you manage your savings and plan for retirement. Find a local advisor today.
Investor’s Impossible Triple: Safety, Liquidity and Growth
All in all, your investments can provide safety, growth and liquidity. But you can’t expect them to bring all three benefits at once. Since you don’t plan to receive distributions for another 5 years, Liquidity Probably not a top priority right now. (Of course, it’s still important to keep in mind.) That makes safety and growth your top concern. So which of the two is more important?
In your case, it’s clear that safety – or avoiding losses from further market downturns – is the primary concern. You don’t have the extra cash to invest in your investments, and the fact that they were so cautious shows that you don’t think they can pull off much success.
You may or may not be right to think so. It’s hard to say without looking at the hard numbers. And there may be steps you can take to make your portfolio more conservative. On the other hand, perhaps your displeasure indicates that the safety-first approach is no longer working.
Challenge: Beat inflation
The reason to invest in the first place is to maximize the value of your money as much as possible. Many obstacles stand in the way of that goal. But one barrier that will always be there, to some extent, is inflation.
So as an investor your battle is with inflationary First. And the only way to win that battle is to own something that grows in value faster (or at least equal to) the rate of inflation.
Can you make profit without risk?
With all these principles established, let’s get back to the main question: How can you avoid putting your money at risk and still profit from it?
Sadly, the short answer is you can’t. No risk usually means no profit.
That said, you can get minimal returns, with minimal risk, by investing in debt. In other words, you lend money to someone and get paid some interest. Some examples include:
-
Certificates of deposit. These financial vehicles are currently paying around 3% for a 12-month term. Your money will be kept in CD until the due date or you will be penalized.
-
Currency market. These savings accounts are paying around 1.5% today.
-
Treasury bonds. These government-backed bonds currently pay about 3.1% interest on the two-year bond.
-
Treasury Inflation Protected Securities (TIPS). This type of Treasury bond has a principal value determined by the prevailing inflation rate, which affects the interest payable.
-
I bond. The interest rate on this Treasury bond is determined by the current inflation rate. Current interest rate for I bond is 9.62%.
-
These investments will not make you much money. But they will help mitigate the impact of inflation and won’t change much in value.
Such modest gains are enough for some investors. But they may not be enough for you.
How to approach your investments
Sure, you don’t have income to spare right now and you won’t start withdrawing money from your portfolio in a few years, so investing in low-risk assets sounds good. attractive look.
But “starting” withdrawing money from your portfolio is very different from draining it. How long should those savings last? If you plan to withdraw money from your portfolio over the next 20 years, you have to accept a certain amount of risk if you want to keep up with (or beat) inflation.
The good news is that exposure may not be as scary as one might think. If you have a long time and can get away annual withdrawal of about 4% or less, you can put your portfolio in a good position with just the right amount of risk.
For example, a well-diversified portfolio may have “buckets” of money with different risk profiles over different time periods. You can have a share of about 25% of your investment fund in cash and bonds for short-term withdrawal.
The second quarter could be toward high-yield bonds and stocks with maturities of 6 to 10 years. The last half will be in the “group” most active with holding stocks and real estate. You will not plan to withdraw from this bucket until 11 years or more have passed.
What to do next?
As I always tell my clients, you must not go from being aggressive to conservative or vice versa. It happens gradually over years, even decades.
And that’s true of investing in general: No matter how exciting or scary things look at any given moment, remember it’s the long game. Success has more to do with sticking to your principles over time, and less to do with picking the “right” horse at the “right time.”
Retirement planning tips
-
Work with an expert. From Social Security and alternative sources of income to medical expenses and long-term care, there are many things to consider when planning for retirement. A financial advisor can help guide you through this complex process. Finding a qualified financial advisor is not difficult. SmartAsset’s free tool connects you with up to three financial advisors serving in your area, and you can interview the right advisors for you for free to decide which one is right for you. If you are ready to find an advisor who can help you achieve your financial goals, start right now.
-
Why you shouldn’t panic in a bear market Pausing investing in a bear market can reduce future retirement income. This chart shows why you shouldn’t stop investing in a bear market.
Image credit: ©iStock.com/Goodboy Picture Company, ©iStock.com/Nattakorn Maneerat
Post Ask a counselor: I live off welfare and food stamps. Can I protect my investments in a bear market? appeared first on SmartAsset Blog.
