Personal Finance

The Stock Market Rollercoaster Could Wreck Baby Boomer Retirement Plans

David Beren

Published: November 29, 2024 2:37 pm

Key Points

• Stock market volatility could be detrimental to baby boomer plans. 
• You always want to have enough cash on hand in case of a market downturn. 
• Diversifying your investments is also key to outlasting a down market. 
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The stock market’s volatility can be incredibly panic-inducing when watching your money rise and fall. If the market is on the rise, everyone will be happy, and baby boomers, in particular, will feel more comfortable with their retirement plans. However, the opposite is true, as the world has seen twice in the last twenty years that even the strongest bull markets can quickly turn negative. 

Millions of retirement accounts were wiped out during the 2008 mortgage crisis and again at the start of COVID-19 when the stock market crashed. In the latter situation, the market’s instability led many people to sell off, and even though the market started to recover two months later, it was too late for millions of baby boomers, which speaks to the overall concern over panic selling.  

Stock Market Risks

Quickly defined, stock market volatility is when the market increases or decreases over a particular period. Higher volatility generally means higher risk and is often associated with political and economic factors. This was well proven during both the mortgage crisis and the COVID-19 panic. 

However, since the market returned in April 2020, growth has increased, and the stock market is firmly in “bull” territory yet again. Since the market has only seen a few “bear” markets or downswings over the last 15 years, many people, baby boomers included, think the market is a safe bet. 

Ultimately, stock market volatility is normal, but this doesn’t mean baby boomers should keep all of their money in one place, and this lesson can be hard to learn. Between political and economic impacts, industry factors, company performance, and sector factors like across technology, volatility can happen at any time. 

Most people will tell you that the best strategy for dealing with market volatility is to take the long view, in that the market will eventually recover. Bear markets, or when the market falls by more than 20%, are relatively short compared to Bull markets, which is also one thing to consider. 

What Not To Do

Even with the understanding that the market has risks, there are a few important factors to remember. First and foremost, do not act impulsively, as this can be an easy way to take more losses than necessary and or miss gains if you’re too unsure. The best thing any baby boomer can do is to make decisions when their head is clear. 

This previous point leads directly to the second thing not to do, which is not to let emotions run your portfolio. This ties together with the first point, as you cannot let your emotional concerns over losses guide your next move. It would help if you only made an additional investment or sold off a loser when you have a clear head. 

The third and most crucial consideration is another opportunity to emphasize not to make any big moves based on short-term market conditions. This again takes us back to the COVID-19 example, where the market saw record losses for two months but eventually recovered, and now, four years later, it is as high as it has ever been. 

Protect Your Portfolio

Diversification 

If there is a concern about market volatility and bear markets, the best thing for a baby boomer is to ensure a diversified portfolio. This means that you likely have investments in many different asset classes or even something as simple as having money spread across different ETFs, high-yield savings accounts, CDs, mutual funds, bonds, and, most importantly, a strong cash reserve. 

According to leading financial experts, picking up a mutual fund with upwards of 12, 15, or even 30 stocks can reduce your risk. You can even look at investing in real estate, though it also comes with some risk. However, the best thing for baby boomers is to balance their portfolio well between sectors like agriculture, tech, healthcare, or telecom. 

You can always rebalance your portfolio, which many financial analysts would say is the correct step to minimize risk. In other words, instead of investing 70% in stocks and 30% in bonds, reassess your allocations and play with these numbers to feel more confident that you can offset any volatility. 

Dividends

For many investors, including boomers, one way to offset potential risks is to bulk investments into stocks that offer dividends. This way, even if a stock falls, there is still a cushion that helps keep you in the black and reduce the level of volatility you feel in the short and long term. In some cases, companies with dividends will even boost the offer temporarily to bring investors back to the stock, which can be a big bonus for a boomer if they hold firm. 

Income-Focused Funds

Income-focused investing can also be a smart strategy for baby boomers to generate additional earnings without as much volatility or risk as general stock investing. This goes back to the dividend example, as it looks at dividends as a way to guarantee a certain level of return no matter the market condition. 

However, this goes beyond dividends and could be like a real estate investment trust or mutual fund. Even index funds qualify and can help you generate positive cash flow without worrying about market volatility. Yes, your earnings will be lower than a stock jumping up because of strong earnings, but these are also a much safer option for those with lower risk tolerance. 

Establishing Cash Reserves

Among the most important strategies for baby boomers to survive volatile market conditions is having safe cash reserves. This may be especially true for retirees who don’t have additional income. Still, for any age, “cash reserves offer a buffer against volatility and allow you to live your life with less worry,” according to TIAA Head of Financial Planning Dan Keady. 

The biggest question is how much cash you would want to keep on hand in case of uncertain market conditions and economic downturns. There isn’t a specific number, as it varies depending on which financial expert you talk to, but for most people, planning for six months and a year is the best place to start. This type of emergency fund will help you feel comfortable staying the course during a volatile market without worrying about your rent or mortgage payment and ensuring you can put food on the table. 

However, planning for at least one to two years of cash would be ideal if you are a retired baby boomer and are not generating additional income. This would allow you to rest comfortably at night, knowing you can handle emergencies and ensure your other bills will be paid on time. Considering the 2008/2009 financial crisis lasted around 18 months, having enough cash to push through this timeframe would be the best starting point.