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Is My Retirement at Risk?

Christine Benz points out two areas to evaluate.

Editor’s note: Read the latest on how the coronavirus is rattling the markets and what investors can do to navigate it.

Christine Benz: Now let's tackle another common financial worry these days, which is whether the recent volatility that we've had in the stock market and a little bit in the bond market could force you to rethink your retirement plan. So the key thing to think about in this situation is just how close you are to retirement.

If you're within 10 years of retirement, I really do think it's a good idea to check up on the viability of your plan. Even though you often hear people say, "Don't peek, don't do anything during periods of market volatility," I think, especially now that the dust has settled a little bit in the short term, it's a good time to do a checkup on the viability of your retirement plan. The gold standard in doing that is to sit down with a financial planner who will look at your total plan, will look at your total budget, your cash flow, how much you have set aside in retirement assets, and will give you some concrete strategies for coping with the current volatility.

Alternatively, or perhaps in addition to sitting down with a financial planner, I like the idea of taking a spin through one of many retirement calculators that you can find online. So a couple that I've often recommended include T. Rowe Price's Retirement Income Calculator. It's very holistic and comprehensive. It takes into account nonportfolio sources of income, like Social Security, so it's encompassing, which is a positive. For more of a quick-and-dirty view of the viability of your retirement plan, I like Vanguard's Nest Egg calculator as well. But run through a few of these calculators. You'll plug in some variables about how much you've saved and how much you plan to save before you retire, and you'll get some guidance on whether your plan looks viable.

So if it looks like you do have some work to do, I think it's worth thinking about the fact that you do have some tools at your disposal. So the obvious one is to think about working longer, which certainly a lot of people don't want to hear, especially if they were planning retirement within the next few years, but it can be incredibly impactful. Even delaying retirement just a couple of years--because you're able to forestall withdrawals from your portfolio, you may be able to make additional contributions, you'll be able to delay social security, which is a real biggie when it comes to enlarging your overall benefit from social security. So delaying retirement is one possibility.

You might also be able to look at making some adjustments on the lifestyle side of the ledger, so look at your planned in-retirement spending and see if you might be able to make some adjustments there. If you are, it may turn out that you're able to retire exactly when you had hoped to because you're willing to cut your expenses in retirement. Big-ticket cuts might include relocating or downsizing to a smaller home, but you might also be able to identify some smaller parts of your budget to cut back to make your plan work.

So first of all, try to get your arms around the viability of your plan and any changes that you might make to make it work. Then turn your attention to your investment portfolio. And there I think it makes sense to start with your portfolio's mix of stocks and bonds and cash, and just look at whether you have enough earmarked in safer investments to help tide you through the first years of your retirement. This is especially important for people who expect to retire within, say, the next five years. The last thing you would want during this volatile and uncertain period is to have a portfolio that's almost entirely stocks. Yes, the long-run potential of stocks is higher than is the case for cash and bonds, certainly today, but the volatility potential is higher, too. So if you retire with too much in stocks, there's too great a risk that you might need to sell some of those stocks to meet your cash flows when your portfolio is at a low ebb.

So the takeaway here is that if you had planned to retire within the next five years, you definitely want to de-risk the portion of your portfolio that you would spend in the early years of your retirement. That means that you'd move it over into safer assets like cash and like bonds. You definitely don't want to overdo it with the safe stuff because the return potential is really, really low today, but you do want to hold enough in safe assets to secure your standard of living in the early years of your anticipated retirement.

If you have a longer time frame to retirement--if you have, say, five or 10 years or even longer--there my bias would be to wait before doing any sort of dramatic de-risking. The reason is that, as I said, yields on cash and bonds are really low and you may be able to see some of your long-term assets recover. My bias in that situation, if you do have a longer time horizon to retirement, is to de-risk very slowly. So perhaps take some money off the table, move additional contributions that you're making into safer assets, but not take radical steps to do any de-risking at this point in time.

For sure, it's an unsettling time for people who are getting close to retirement. But I think looking at those two key things on your dashboard--looking at the viability of your total plan and seeing if any course corrections are in order there and also looking at your portfolio and seeing if any adjustments are in order there--those are two key things to be thinking about at this time.