These 2 Things Could Upend Your Retirement. Here’s How to Protect Yourself

Many people spend years planning and saving for retirement. But as you plan, you may forget to consider certain factors throwing your finances off track. Here are two specific things that could turn your retirement upside down — and what you can do about it.

1. Inflation

Inflation has wreaked havoc on seniors in particular this year. But even in times of more moderate inflation, senior citizens lose purchasing power slightly every year.

Part of the problem has to do with Social Security — or more specifically, the fact that their annual cost-of-living adjustments often don’t keep pace with inflation. So if you don’t want inflation to ruin your retirement, make a point of having an income outside of Social Security. Building a solid nest egg gives you extra cash to tap into at times when your Social Security benefits just can’t keep up.

At the same time, be sure to keep some of your retirement savings in stocks. You may be inclined to favor safer, more conservative investments at this stage in life, and that’s okay. But if you divest your stocks entirely, your portfolio growth could be stunted at a time in your life when you need it to keep up with inflation.

2. A stock market crash

Even if you steered away from stocks before you retired, a prolonged market downturn could be a source of serious financial stress. And it’s hard to tell how many times the market will crash over the course of your retirement, and how long and extreme each crash you experience will be.

The solution? First, make sure your wealth is age-appropriately distributed so you’re not overly burdened with stocks. If you’re in your 60s, you should limit your stock holdings to 50% of your portfolio.

It’s also a good idea to choose investments that pay you consistently, as these could help offset losses in your portfolio. Dividend stocks and municipal bonds can be a great source of steady income in both good times and bad for the stock market. But in the latter scenario, earning that consistent income could mean you don’t have to sell investments when they’re in the red and face permanent losses.

One thing to keep in mind is that companies that pay dividends have the right to change or stop making those payments at their discretion. So if you want more of a guaranteed income stream, you might want to favor municipal bonds.

Admittedly, in extreme cases, bond issuers could default on the interest payments they are obligated to make. But at least that obligation exists, while corporations are not required to pay dividends.

Be prepared for different curveballs

Even if you do your best to plan your retirement well, you never know when inflation or an underperforming stock market could upset your plans. But if you take steps to account for these scenarios, you may be able to avoid much of the financial stress that so many seniors face.