Want to retire in 2021? 3 tips to make that happen
Managing retirement savings during turbulent markets
Morgan Stanley private wealth adviser Mary Deatherage joins Barron’s Roundtable to discuss what retirement savings options will help generate income in a low-yield environment.
Many people estimate their retirement date well in advance and hope that somehow, things all work out. But what if your anticipated retirement date is next year — as in, the year following the nightmare that is 2020?
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Right now, the economy is stuck in a recession, and while the stock market has recovered from its earlier-in-the-year crash, we may have yet another downturn to endure before 2020 is up. As such, you may be wondering whether retiring in the coming year is even feasible given the circumstances at hand. But if you're intent on leaving the workforce for good in 2021, here are some things you can do to increase your chances of meeting that goal.
1. Boost your emergency savings now
If the stock market does indeed tank sometime later this year like it did back in March, your retirement savings could take a major hit. And taking withdrawals when your plan balance is down is a good way to lock in permanent losses that hurt you throughout your senior years. That's why it's important to have some emergency cash reserves. That way, if the market does crash again, you'll have an income source to tap while you wait for it to recover.
A good rule of thumb is to estimate how much you'll spend each month on living expenses in retirement, and save six times that sum in cash. Of course, it may be the case that you have a portion of your IRA or 401(k) in cash already, in which case you can go a bit easier on your emergency fund. But either way, a little extra cash certainly doesn't hurt during periods of volatility.
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2. Make sure your retirement plan is invested appropriately
The last thing you want to do is wait for your retirement plan to tank before shifting investments around. If you think there's a good chance you'll be taking withdrawals from that account next year, now's the time to review your investments and make sure your assets are allocated appropriately. For the most part, that means having a healthy mix of stocks and bonds, and, as just mentioned, also having some money in cash.
What percentage of your IRA or 401(k) should you leave in stocks? It depends on your risk tolerance, but as a general rule, if you're in your mid-to-late 60s when you retire, stocks should comprise about 45% of your portfolio. But that assumes your appetite for risk is average. If it's higher, or you have other income sources, then you may be comfortable having 60% or more of your portfolio in stocks. The key, however, is to assess things ahead of time.
3. Apply for a home equity line of credit
If you own a home and are thinking of retiring next year, there's a good chance you're mortgage-free already, and that you therefore have a ton of equity in that property. Given the uncertainty that lies ahead, it pays to apply for a home equity line of credit (HELOC).
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With a HELOC, you're not borrowing money outright; you're simply making that option available to yourself. Having a HELOC could help you leave your retirement savings intact if the market does indeed take a turn for the much, much worse. It could also make it possible to delay your Social Security filing, thereby growing your benefits for life (but if you're going to adopt that strategy, make sure the interest rate on your HELOC is lower than the 8% annual boost you'll get by delaying your filing).
Retiring in 2021 may seem like a crazy idea, but if you prepare accordingly, it can be done. And that, in turn, will give you more one thing to look forward to as we all sit back and wait for this crazy year to be over.
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