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- Some economists have warned that a recession is likely in 2023, meaning retirement may be more difficult in the near future.
- If you’re worried about market volatility, financial planner Alex Alba recommends pulling your money out of stocks.
- Instead, put one to five years worth of expenses into a CD or high-yield savings account.
Concerns about inflation, anxiety about a possible recession and volatility in the stock market are prompting many Americans to push back on their retirement plans. An August survey by the Nationwide Retirement Institute found that 40% of workers age 45 and older had done so.
Alex Alba, a financial planner at Merit Financial Advisors, tells Insider that many of his clients who are preparing for retirement are now struggling with it.
“One of my clients, who was planning to retire in 2023, says: “I think my pension will be affected. I don’t know what to do,” says Alba. “So we did the pension calculations and we asked him:
In the current environment, after calculating your annual expenses in retirement, Alba recommends redistributing one to five years of investments in cash assets if you’re risk-averse. For example, if you’re taking out $250,000 for the first five years of your retirement starting in 2023, Alba suggests putting $50,000 into a regular checking or savings account first.
The rest of the money can be divided among these three places if you are worried about a recession that can cause large swings in the stock market.
1. Certificate of Deposit (CD)
“I would use CDs to put some of your cash to work if you’re afraid of that market volatility,” Alba says.
A certificate of deposit (CD) is a type of deposit account that offers a fixed interest rate if you keep the money in your account for a certain period of time, ranging from a few months to five years or more. Longer CD term contracts typically offer higher interest rates.
A fixed rate CD can provide more peace of mind to the risk-averse investor, especially as economists predict that the stock market could become more volatile in 2023.
Alba recommends diversifying your funds to ensure the highest possible returns in retirement. A bond is a loan you make to a company in exchange for a fixed income from interest over a fixed period of time. Bonds typically offer lower returns than other investments. Alba adds: “We’ve had a terrible year for bonds, but fixed income from bonds will eventually come back.”
I bonds, issued by the US Treasury Department, are one of the most common types of bonds. As of the end of January 2023, the I bonds offered an interest rate of 6.89%. You may purchase up to $10,000 of electronic I bonds and $5,000 of paper I bonds in a calendar year. You can pay off your I bond after 12 months, but if you cash the bond in less than five years, you lose the last three months of interest.
Compared to the stock market, Alba says: “I see fixed income bonds as a good investment, but you won’t have the same volatility as you would in an equity-based portfolio.”
3. High Yield Savings Account
Alba’s next recommendation is to move a portion of your retirement nest egg into a high-yield savings account.
Some high-yield savings accounts offer interest rates in excess of 3%, much higher than regular savings accounts, which typically only offer an APY of around 0.16%. Instead of keeping your money in a retirement account, which may decline in value as we experience more stock market volatility, putting it in a high-yield savings account with a positive interest rate will guarantee that your money will grow.
It’s important to note that interest rates on high-yield savings accounts can vary slightly from month to month. However, money held in high-yield savings accounts will not decline in value the way money in the stock market can during volatile periods.
“Obviously, you want to make sure you have your emergency fund first,” says Alba. “I’ll make sure you’re comfortable in your current situation, paying bills, credit card debt, and all that good stuff. Finally, you should double-check your retirement plan with a financial professional before using cash. smart way”.