If the economy takes a turn for the worse this year, a few small, simple actions can collectively make a big difference.
How much money do you need to retire? Here’s what you need to know about saving.
A comfortable retirement requires years of preparation and savings. Here’s what you need to know:
The market may be in turmoil right now. But between rising inflation, below-average GDP growth, weak consumer confidence, and the protracted conflict in Iran, the risk of a recession remains too high to ignore. Here’s how retirees can protect their retirement income if this worst-case scenario comes true.
1. Own dividend stocks that can be expected to provide reliable dividends
This is obvious to most people, but it still needs to be said clearly. Check whether the dividend payer is prepared to continue funding these payments even in the midst of economic turmoil. These reliable high-dividend stocks include stocks like Coca-Cola. (NYSE: KO) and Verizon Communications (NYSE:VZ)providing products that maintain market value regardless of the environment.
2. Shifting the maturity date of bonds
If you also hold bonds for income (or instead), make sure their underlying maturity dates are spread out over years, if not decades, into the future. This means that all bonds have different effective interest rates, but more importantly, it also minimizes the risk that the large amount of money you receive when one of these bonds matures will be locked in at an unusually low interest rate.
3. Treasury Inflation-Protected Securities (TIPS)
Separately and at the same time, Treasury Inflation Protected Securities (TIPS) are an effective way to ensure that interest payments are not lost to inflation if inflation is a factor in the recession.
Simply put, TIPS are bonds issued by the federal government whose interest payments fluctuate to reflect changes in the Bureau of Labor Statistics’ Consumer Price Index (CPI). Interest payments are typically lower than corporate bonds. However, if you are willing to accept lower interest payments in exchange for reduced risk, this option may be worth taking advantage of, especially during a recession.
That said, exchange-traded funds (ETFs) like the iShares TIPS Bond ETF (NYSEMKT: Hint) or the Vanguard Short-Term Inflation-Protected Securities ETF (NASDAQ:VTIP) It may be an easier option than figuring out which inflation-protected securities in the actual Treasury to buy.
4. Have plenty of cash (but make the most of it)
If economic turmoil is likely to affect your portfolio’s ability to generate adequate retirement income, try to carve out a large amount of cash now to meet your projected cash needs. The last thing you want to do is be forced to sell something when the market is down.
Be wise and careful with this cash. Savings and checking accounts at most banks don’t offer much in the way of profits. However, many online banks and most brokerages now offer 4% on cash-like money market accounts.
5. Pension some of your retirement savings
Finally, although it may not be suitable for everyone, consider annuitizing some of your retirement savings to generate a reliable annual return over a period of time. These returns are typically lower than the market’s average annual return. But you get paid even if the market goes down.
Note that this guarantee is only as strong as the insurance company offering the annuity.
Mr. James Brumley holds a position at Coca-Cola Company. The Motley Fool recommends Verizon Communications. The Motley Fool has a disclosure policy.
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