Recent announcements reported by CNBC concerned some of our clients and friends. We were again reminded how critical it is to ensure your retirement plan is resilient enough to withstand financial shocks.
Here’s how to stress test your retirement plan, focusing on adjusting your investment allocations, managing healthcare options, and maintaining financial stability.
1. Maximize Your Emergency Fund
Start by ensuring you have a robust emergency fund. Aim for 12 months of living expenses, especially if you risk losing your job. This will help you avoid dipping into retirement accounts prematurely, which can lead to penalties and a loss of future growth. If your emergency fund isn’t sufficient, prioritize building it up now.
2. Tighten and Project Your Cash Flow
Evaluate your cash flow critically. Limit your budget to essentials and eliminate non-essential expenses to free up cash. Understanding your baseline monthly payments will give you a clearer picture of how long you can sustain yourself without relying on your retirement savings.
Factor in the potential loss of employer-sponsored benefits, particularly health insurance. COBRA, while providing continuity of coverage, can be expensive, so you’ll need to budget for higher premiums. Consider other healthcare options like the Health Insurance Marketplace, short-term plans, or your spouse’s employer to balance cost and coverage.
3. Reevaluate Your Investment Allocations
Given your proximity to retirement, now is the time to closely examine your investment portfolio. A key focus should be on your allocation between equities and bonds:
Equities: Stocks have the potential for higher returns, but they also come with greater risk, especially in a volatile market. If you’re heavily invested in equities, particularly in sectors tied to manufacturing, a market downturn could significantly impact your retirement savings.
Bonds: Bonds, on the other hand, offer more stability and predictable returns, making them an essential component of a pre-retirement portfolio. As you near retirement, consider increasing your allocation to bonds. This doesn’t mean abandoning equities altogether but finding a balanced mix that aligns with your reduced risk tolerance.
A common strategy is the “glide path” approach, where you gradually shift from a higher equity allocation to a more bond-heavy portfolio as you approach retirement. This helps to protect your savings from market downturns while allowing for some growth.
4. Consider New Income Opportunities
If layoffs occur, generating additional income can help you avoid tapping into retirement savings. Explore side work, consulting, or part-time jobs that align with your expertise. This supplemental income provides financial relief and keeps you active and engaged.
If you’ve been contemplating a career change, this might be an opportune time to explore new fields that could carry you into retirement.
5. Reevaluate Your Retirement Timeline
A layoff might prompt you to reconsider your retirement age. Early retirement could reduce your Social Security benefits and limit your savings’ growth potential. Consider working a few more years, which can significantly boost your retirement savings and delay the need to draw on Social Security, increasing your monthly benefit.
6. Healthcare Options After a Layoff
Healthcare is a significant concern after a layoff, especially if you’re in your late 40s or early 50s. Here are some things to familiarize with as you manage any late-career transition:
COBRA: Offers continuity of your employer-sponsored health insurance for up to 18 months, but at a higher cost since you’ll pay the entire premium plus an administrative fee.
Health Insurance Marketplace: This may provide more affordable options, mainly if your income drops significantly. You may qualify for subsidies that can reduce your premiums.
Short-Term Plans: These are less expensive but often have limited coverage. Use them cautiously, as they may not cover essential health services.
Spouse’s Plan: This is often the most cost-effective option, allowing you to maintain comprehensive coverage.
Medicaid: If your income drops significantly, you may qualify for Medicaid, which offers low-cost or free coverage, depending on your state’s eligibility requirements.
We invite you to review our Retirement Planning Checklist: 5 Steps to Prepare for Retirement!
At Scarborough Capital Management we're ready to help you stay ready for any changes life might send your way.
Securities offered through Independent Financial Group, LLC (IFG), a registered broker-dealer. Member FINRA/SIPC. Advisory services offered through Scarborough Capital Management, a federally registered investment Adviser under the Investment Advisers Act of 1940. Registration as an investment adviser does not imply a certain level of skill or training. IFG and Scarborough Capital Management are unaffiliated entities.