27 Jun Can I still retire after the stock market downturn?

Q. I was planning to retire next year so only 70% of my retirement funds are in stocks. Of course they have taken a really bad hit but hopefully it will come back over time. How can I figure out, given that I don’t have a crystal ball, if I still have enough to retire next year or if I might have to work longer? I don’t want to take losses on these investments.
— Still working

A. Oh, to have a crystal ball!

No one knows what the future will bring but having a Plan A, B, C and even D to account for various situations is important because as you can see, things don’t always go according to plan.

A good place to start is to understand your budget and your spending, said Jeanne Kane, a certified financial planner with JFL Total Wealth Management in Boonton.

“If you haven’t figured out a retirement budget, you should do so now,” she said. “This will look different than your current budget because some areas will likely be less, such as dry cleaning or lunch out and some areas are likely to be more, such as travel.”

Kane said you should group your spending in three buckets.

The first is your needs. These include your core living expenses such as health care, rent/mortgage payments, property taxes, food, utilities, gas and so on.

Then there are your wants, such as buying a new or used car periodically, going on vacation and your hobbies.

The third bucket is for your wishes, which might include giving money to children and grandchildren or charity, she said.

You’ll also need to know your income in retirement, which might include a pension, Social Security, annuities and income from your investments.

If you haven’t already done so, go to ssa.gov to get an estimate of your Social Security retirement benefits.

“This will help you understand how much you’ll receive if you claim early, at full retirement age, or if you wait until age 70 when the benefits max out,” Kane said. “Claiming early will permanently reduce your benefit. If you wait to claim after your full retirement age, you’ll get an 8% bump each year you wait up until age 70.”

Now to your investments, which can provide a source of income.

Kane recommends you start with what’s called the 4% rule.

“This is a rule of thumb that suggests that retirees can safely withdraw 4% of the value of your retirement funds each year,” she said. “Then add up your income sources and 4% of your investments and subtract your needs, wants, and wishes budgets. What do you have left over?”

Kane said you won’t know if you have enough in your investments until you know what your income and your spending are.

You said currently invested in a portfolio of 70% stocks.

“Simple guidelines are that 80% stock or more is considered aggressive, 60% stock is considered moderate, and 40% stock or less is considered conservative,” Kane said.

Exactly where you should be invested depends on several items, starting with your risk tolerance.

“How much volatility can you handle? Said another way, how much of a drop in the market can you tolerate before you want to change your portfolio? Or, how much risk are you willing to take for a higher rate of return?” she said you should ask yourself.

You also need to look at when you need the money. Someone who is in their 20s has a much longer time horizon and more time to recover from a market decline than someone in their 60s, she said.

“As someone who is working, you’re in the accumulation phase of investing. This means that your goal is to save and grow your money,” she said. “When you retire, you’ll move into the preservation of investing. Your goal in this phase is to preserve your portfolio and manage risk.”

If you want to retire next year, taking a close look at your expenses and income is key, especially if you’re depending a lot on your portfolio.

It makes sense to speak to a financial advisor who can help project your future retirement income, what part your portfolio will play and whether it’s enough to sustain you for a long retirement.

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This story was originally published on June 27, 2022.

NJMoneyHelp.com presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.