What if the market crashes when I’m ready to retire?
THE STACK #46One of the biggest fears people have about investing in the stock market is that it will crash when they’re ready to retire.
I hate to break it to you, but the market will always crash — that’s a given.
As an investor, your ability to prepare for market crashes sets you apart. Create an investing strategy that allows you to thrive even when the market crashes.
In this newsletter, we will explore different strategies you can use to safeguard your investments in the event of a market crash.
THE STACK
Look at the facts
A stock market crash occurs when it undergoes a sudden and severe decline of 20% or more from its most recent peak.
In the last 30 years, the stock market has crashed eight times.
The longest stock market crash was the Dotcom crash in 2000, which lasted for 31 months and saw a 49% decline from its all-time high.
Since 1929, a stock market crash has occurred, on average, every 4.8 years.
Despite these crashes, the stock market has always recovered. As long as you are willing to leave your investments alone, they will recover in due time.
A stock market doesn’t always result in a personal loss of capital
The S&P 500 has increased by 86.33% over the last five years.
For example, if you had invested $100,000 in 2019, your initial investment would have grown to $186,330 by 2024.
However, assuming a 20% market crash in 2024, you would have lost 20% of $186,330 rather than the initial $100,000.
This means that by the end of 2024, you would have $149,064, still resulting in a 49% profit.
If you are a long-term investor, you might not always experience a personal loss during a market crash.
Protect your investments by building a cash cushion
Based on historical data, market crashes occur approximately every five years and typically last about 31 months. However, the market has consistently shown the ability to recover when given sufficient time.
To safeguard your investments from a market crash during retirement, it is essential to have a cash cushion to cover your living expenses in the event of a crash.
Rather than selling your investments at a loss, you can allow them to rebound while utilizing your cash cushion for living expenses.
You should start building a cash cushion five years before your retirement date with an amount that can cover your living expenses for at least 30-36 months.
For example, if your monthly retirement expenses amount to $4,000, you will need a cash cushion of $4,000 x 36 = $144,000.
Remember: You should only dip into your cash cushion when there's a stock market crash. After the market bounces back, make sure to top up your cash cushion to its original level. If there's no crash, feel free to withdraw from your investments.
How to build a cash cushion
Five years before retirement, you can stop contributing to your investments and divert those funds to build your cash cushion. Only use this strategy if you have already achieved your retirement goal.
If your investment portfolio has exceeded your retirement goal, you can sell some of the excess by selling some of your worst-performing investments in the five years leading up to your retirement.
You can also fund your cash cushion by cashing out your dividends instead of re-investing them. Also do this no more than five years before retirement.
Build a high-yield dividend portfolio to protect your investments
Building a portfolio of high-yield dividend stocks is a great investment strategy because dividends are paid even when the stock market crashes.
By building a portfolio of dividend-paying stocks, you can rely on the dividends as a source of income during market downturns instead of selling your investments at a loss.
For instance, if your retirement investment portfolio is valued at $1,000,000 and has an average dividend yield of 2%, you can earn $20,000 annually from your dividends alone.
THE TOOL
How to build a portfolio of dividends
I will be teaching a live investing class on Wednesday, June 26th, at 1:00 pm EST about building a dividend portfolio.
In this live workshop, you will learn:
The importance of dividends
How to calculate how much dividends you will need to retire comfortably
How to build a dividend portfolio that can supplement your income
What to look for when choosing dividend stocks
What to look for when choosing REITs
Real-time analysis of your favourite dividend stocks
Get a list of the best dividend stocks and REITs
Can't attend live? No worries. Register now to gain access to the replay.
THE ACCOUNTABILITY
Calculate how much cash cushion you will need at retirement.
THE COURAGE
THE KNOWLEDGE
Bear Market
A bear market is a situation in which the prices of stocks, bonds, and other securities are falling. It's usually a sign that investors are feeling pessimistic about the economy and selling off their investments, which can lead to a downward trend in the overall market.
The longest bear market in history lasted for nearly 3 years, from 2007 to 2009. This period of decline was primarily driven by the financial crisis and saw a sustained downturn in stock prices and investor confidence.
Bull Market
A bull market is a situation in which the prices of stocks, bonds, and other securities are rising. This is usually a sign that investors are feeling optimistic about the economy and are eager to buy and invest. In a bull market, there's a general upward trend in the market, and it's often seen as a positive sign for the economy.
The longest bull market in history lasted for about 11 years, from March 2009 to March 2020. This period of growth followed the financial crisis of 2008 and was characterized by a sustained upward trend in stock prices and a generally optimistic outlook on the economy.
about the newsletterEvery Saturday, subscribers will receive one money tip, one tool, one actionable step, one word of courage and learn a new finance term to help you gain control of your finances in less than five minutes.
Free resources
Keep reading the latest NEWSLETTERS
How I manifested a girl's trip to Costa Rica