Federal banking regulators routinely force banks to “stress test” their portfolios, modelling what would happen under various troublesome economic scenarios. They do this so that banks have a chance to shore up wobbly loan portfolios and liabilities before the crisis arises.
Have you done the same with your retirement plan?
A new survey shows that nearly half of Americans have not.
The latest Country Financial Security Index shows that almost half of all Americans could not withstand a sudden 6,000 point hit to the Dow Jones Industrial average, which would slash much of their retirement portfolio’s power to generate income in retirement.
A decline of that magnitude would constitute roughly a 25 percent drop from current levels (depending, of course, on when you read this!)
It has not even been a decade since we have seen a decline at that level – it last occurred in 2009, during the worst of the Great Recession and the mortgage crisis, which spilled over into stocks and real estate – though it was a boon for gold investors and for those willing to pick up real estate and other assets at bargain basement prices.
“Our motivation in asking the question was to get investors’ attention,” says Doyle Williams, executive Vice President at Country Financial, the Bloomington, Ill. insurance and financial services company. “We want them to think about a drop of this size ahead of time, to get them to think about what they would do in the moment,” he told editors of USAToday, ahead of the survey’s publication.
Only about half of Americans – 52 percent – told surveyors that they were “financially prepared” for a 25 percent decline in the stock market as of February 2018. However, only 28 percent reported having any kind of financial safety plan in place. 44 percent reported having no such plan.
What would such a plan look like?
Here are some suggestions:
1.) Maintain a significant emergency fund. Ideally, you should have 3 to 6 months of financial reserves to see you through any manner of emergencies. For many people, this may not be an easy practice: A 2017 study, also by Country Financial, found that about half of Americans – 49 percent – do not have enough savings on hand to cover three months of expenses if they lost their jobs or other primary sources of income.
If you fall into the above category, chances are your emergency fund can use some shoring up. Checking and savings accounts, money market funds and cash value in permanent life insurance policies are all good homes for your emergency fund savings.
2.) Reduce debt. Your emergency fund will probably last a lot longer if you do not have any payments.
3.) Fully fund your IRA or Roth IRA (including Self-Directed IRAs). Your IRA savings can pull double duty: Contributions can grow tax-deferred or – in the case of Roth IRAs – tax free as long as the money remains in the account, into retirement. Yes, there is a 10 percent penalty on early distributions under normal circumstances. But IRAs also have a number of hardship provisions that waive this penalty if the withdrawal is made under qualifying circumstances.
These circumstances include:
- Avoidance of foreclosure or eviction
- Paying for qualifying medical expenses exceeding 10 percent of your adjusted gross income
- Paying for health insurance premiums.
Do not rely on 401(k) assets for emergency savings. Many companies do not allow for in-service withdrawals, and emergency hardship withdrawal limits are generally much more stringent. However, if your plan allows for loans against your 401(k) balances, this could help in a pinch. Remember you must pay the loan back to the plan.
4.) Diversify your portfolio. If you are overexposed to stocks – so much that the prospect of a 25 percent or even a 50 percent decline scares you, it is time to diversify. Move money into other asset classes, such as bonds, real estate, precious metals, and even further afield. A Self-Directed IRA can be an excellent vehicle for diversifying your retirement portfolio while still retaining the possibility for significant long-term gains.
For more information on using a Self-Directed IRA to increase diversification and potentially reduce your overall risk exposure in the event of a big stock market decline, call American IRA, LLC today at 866-7500-IRA (472).