Most Americans feel reasonably secure about retirement, even in a shaky economy. a new one Work improvement report found that 79% of employees are at least somewhat confident in their understanding of retirement planning and 71% feel at least somewhat confident that they will be able to save enough for retirement. However, the report shows that many still worry about how changes in the stock market could derail their plans, especially as they approach retirement.
Here are the top retirement fears of American workers related to the stock marketmore expert advice on how to tackle them.
More than half of American workers (58%) fear a major accident will occur just before retirement.
“The fact that 58% of workers are afraid of a last-minute accident is actually reasonable,” said Mindy Yu, senior director of investments at Betterment at Work. “This is what’s known as ‘sequence of returns risk’ – the danger that the market will fall sharply just when you need to start withdrawing funds.”
If the market drops 20% the year you retire and you’re forced to sell stocks to pay your bills, you’re locking in those losses and potentially shortening the life of your portfolio by years. Despite this risk, there is ways to protect yourself.
“The best way to protect yourself is by building a liquidity buffer or cash envelope by keeping a few years of essential living expenses in a high-yield cash account or short-term bonds,” Yu said. “This acts as both a financial and a psychological safety net; if the market crashes, you can pull out your cash instead of selling stocks at a loss, giving your portfolio time to recover.”
This wrong-time crash scenario is scary, but manageable with proper planning.
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The next most common fear (50%) is that the market will not generate high enough long-term returns to fund retirement. The The best way to deal with this fear is through diversification.
“A well-diversified portfolio across asset classes, such as stocks and bonds, and across regions, including the US and international markets, can help manage risk and improve the consistency of returns over time,” Yu said. “Diversification can be especially important if markets are underperforming, because different assets can respond differently to economic conditions.”
Yu also recommended changing the allocation over time.
“As you approach retirement, transitioning to a more conservative allocation through a sliding path that gradually increases your exposure to bonds can help reduce risk,” he said. “Bonds, especially those that offer higher yields or are designed to keep pace with inflation, can provide a more stable income stream and help preserve your spending power.”
Planning for flexibility is also essential.
“Even in years when returns are lower, a carefully designed retirement portfolio that focuses on diversification and adjusted risk can help you manage withdrawals and maintain income over time,” Yu said.
For those concerned about generating income, he recommended using a portion of your portfolio to buy a simple, low-cost annuity.
“If you can cover essential expenses (utilities, food, taxes) with guaranteed income, you reduce the pressure on the remaining investments to carry out each year,” Yu said. “In turn, this allows the rest of your portfolio to stay invested for long-term growth, giving you the time and flexibility you need to ride out a headwind.”
Importantly, you should review your portfolio exposures on a regular basis to ensure you are aligned with your retirement goals and maintain appropriate risk.
About a third of American employees (34%) are afraid not taking enough risk and losing potential growth.
“At its core, investing is a trade-off: your potential returns are proportional to the amount of risk you’re willing to take,” Yu said. “The goal is to find a middle ground that balances long-term growth and safety. In other words, a level of ‘gold rush’ risk, not so aggressive that you panic during a crash, and not so conservative that inflation erodes your purchasing power.”
Finding your “right” level requires understanding the difference between risk tolerance and risk capacity.
“Risk tolerance is emotional — how you feel and behave when the market goes down,” Yu said. “Risk capacity is financial: how much risk your plan can realistically take and still meet your goals.”
To make sure you’re getting the right level of risk, Yu recommended using an objective, goal-based risk assessment that ties your portfolio risk directly to your time horizon, income needs and financial goals.
“One of the most effective ways to calibrate this over time is an automated glide path, which will gradually shift your allocation from high-growth stocks to more stable assets as you approach retirement,” he said.
“Early on, it helps you capture the higher growth you need; as you approach your ‘red line’, your retirement date, it automatically applies the brakes, so you’re not constantly worrying about whether you’re taking the ‘right’ risk.”
Retirement always involves uncertainty, but understanding your risks and adjusting your plan as you get closer can give you more control. With a diversified portfolio, a reasonable level of risk, and a solid income strategy, you’ll be better positioned to withstand market swings and stay on track.
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This article originally appeared on GOBankingRates.com: 3 Stock market fears of future retirees and smart ways to handle them
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