Protect Your Savings in Turbulent Times

If you’re looking to increase or protect your savings for retirement, this year has been a roller-coaster ride — and that’s true whether you’re still collecting a paycheck or you’ve already made your exit from the workforce.

Conflicting signals about the economy and the financial markets abound. Inflation is finally under control — no, wait, it may be ticking up again, the latest data suggests. Tariffs are on, then off, higher, then lower, on a continuous loop. Stocks nose-dived in April, then shot up to record highs. As for a possible recession? Economists keep changing their minds, with the latest forecasts putting the chances of a downturn in the next 12 months at 30% to 40%, down from as high as 60% earlier this year.

Faced with these headwinds, many Americans are increasingly stressed about the potential impact on their financial security. More than half of people ages 45 to 75 now say they’re concerned about outliving their money in retirement — a jump of six percentage points from a year ago, according to a recent survey from the Alliance for Lifetime Income, a nonprofit consortium of annuity providers. Nearly half of the preretirees and retirees polled are revisiting their retirement plans as a result, with moves that include postponing their retirement, cutting expenses and revamping their investment strategies.

Time to protect your savings?

While “stay the course” is standard advice in periods of economic and market turmoil, financial advisers say that reviewing your retirement plan and portfolio now, and tweaking as needed, is critical to ensure you’re prepared for whatever comes.

“If you build in protections as part of the planning process, you’re not dependent on the markets and the economy doing well to have a successful retirement,” says Wade Pfau, a professor at the American College of Financial Services and author of “Retirement Planning Guidebook.” “Small adjustments can have a really big impact.”

That advice feels particularly relevant in periods of heightened uncertainty such as now, when it’s tough to know exactly which danger poses the greatest threat. Being proactive can not only help ensure that your savings last your lifetime but can also alleviate the anxiety that bubbles up for many people in the current environment.

“You can’t control what the president will do about tariffs, how the Federal Reserve will act on interest rates or what happens in the Middle East,” says Michelle Perry Higgins, a principal with California Financial Advisors in San Ramon, California, and a certified financial therapist. “But you can control the level of risk in your portfolio, how much you’re spending and how you plan for life’s what-ifs, which not only is good for you financially but helps lower your stress level as well.”

Eager to protect your savings from the dangers that seem to be lurking everywhere lately? Financial advisers say that these are your best moves now.

Build a strong cash buffer

Your first line of defense to protect your savings in a shaky economic environment is to put together a runway of safe assets that you can tap to fund your living expenses if trouble hits. That way, if a recession materializes that causes unemployment to jump or there’s a prolonged downturn in the stock market, you won’t need to pull money from your retirement portfolio at the worst time to pay your bills.

The biggest threat, if you’re still working and are several years away from retirement: a lengthy bout of joblessness. That could push you into an early exit from the workforce, cutting years off contributions to a 401(k), or nudge you into taking a hardship withdrawal from your account. Some 4.8% of 401(k) participants took such a withdrawal last year, up from just 1.7% in 2020, Vanguard reports — and that was when the economy was still robust.

A traditional emergency fund with enough cash to cover at least three months’ worth of living expenses — stashed in a safe, liquid vehicle such as a money market account — is a solid starting point. But if the labor market weakens, six to 12 months is better, particularly if you’re older. Recently, according to the Bureau of Labor Statistics, workers ages 55 to 64 have required an average of 26 weeks to find a new job after a layoff, and people 65 and older have needed 32 weeks, compared with 19 weeks for employees ages 25 to 34. And those averages would likely rise in a recession.

But if you’re planning to retire in five to 10 years, or you’ve been retired for a decade or less, the greater danger is a lengthy slump in stock prices.

“If a big bear market clocks your portfolio right at the outset and you don’t have safer assets to spend from, you risk not having enough money left to recover when stocks eventually bounce back to sustain you for the rest of your retirement,” says Christine Benz, director of personal finance and retirement planning at Morningstar and author of “How to Retire.”

A Morningstar study last year found that in simulated random trials, about 70% of the portfolios that ran out of money during a 30-year retirement involved retirees who had suffered losses in the first five years of tapping the accounts. The other 30% had gains in those early years but spent too much or experienced big enough losses later on that they ran out of money anyway.

What to do? Benz recommends shifting enough of your portfolio funds to cash to cover your spending needs for two years when combined with your income from other sources, such as a pension, Social Security or wages from part-time work. Keep another five to eight years of spending needs in fixed-income investments.

To further protect your savings overall, it’s also a good idea to identify other assets outside of your portfolio that you could tap to help cover your bills in a down market, such as a cash-value life insurance policy or a reverse mortgage, Pfau advises. “These buffer assets can be expensive,” he says. “But even with the high fees, their value in helping to extend the life of your retirement investments gives you a better financial planning outcome in the end.”

Fix your mix — a little

Small tweaks to ensure that you are appropriately diversified and have the right level of risk in your investments for your age and circumstances can go a long way toward extending the longevity of your retirement savings and giving you peace of mind.

“Big, heroic gestures are never the right move,” says Benz. “If you build a portfolio plan you know is durable, then make small, periodic adjustments as needed, you don’t have to respond to every economic headline, market move or inflationary shock that comes along.”

If, for instance, you haven’t rebalanced in a while, now is the time to do so, because the big run-up in stocks — not only this year but over the past decade — has probably altered your mix substantially. Benz calculates that left untouched, a portfolio that was 60% in U.S. stocks and 40% in U.S. bonds 10 years ago would have shifted to 81% in stocks by the end of June.

This exercise is especially important if you’re in the critical five- to 10-year period just before or after you stop working because of the damage a market swoon in those years can inflict.

“The biggest mistake I see people make is that they have too much risk in their portfolios when they start needing their money,” says certified financial planner Carolyn McClanahan, founder of Life Planning Partners in Jacksonville, Florida. “Don’t shoot the lights out trying to make more money in the market at the risk of losing a lot more.”

McClanahan often recommends a portfolio split evenly between stocks and bonds for clients at this stage. That allocation historically has generated average gains of 8.2% a year, which is 1.5 percentage points less than the 9.7% annual returns from a more aggressive portfolio of 80% stocks and 20% bonds. However, the more moderate blend has lost less, too. Its biggest one-year drop: 22.5%, compared with 34.9% for the more aggressive account.

You don’t want to swing too far to bonds, though, because of another big risk: inflation. That’s especially pertinent now, with many economists concerned that the widespread tariffs imposed by the Trump administration could cause inflation to reignite, although the impact on consumer prices has been muted so far.

“People often think the thing that could really wreck their retirement would be to lose a lot of money in the stock market,” says retirement expert Anne Lester, former head of retirement solutions at J.P. Morgan Asset Management and author of Your Best Financial Life. “But inflation eroding how much your money can buy can be worse.”

At a recent 2.7% rate, for instance, inflation will cut your purchasing power by half over the course of a typical 25- to 30-year retirement. If, as an analysis by the Federal Reserve Bank of Boston found, tariffs add an estimated one to two percentage points to that rate, it would take just 15 to 18 years to inflict the same damage.

Stocks, the only asset class that historically has beaten inflation by a comfortable margin, are still your best hedge against that outcome, says Peter Lazaroff, chief investment officer at Plancorp, a wealth management firm in St. Louis. Research shows that all it takes is at least a 30% commitment to stocks in your portfolio to get that long-term protection, he says.

Benz also recommends layering in some inflation-protected securities in the fixed-income portion of your retirement savings. You might, say, keep anywhere from one-fourth to one-third of your fixed-income holdings in Series I savings bonds and Treasury inflation-protected securities (TIPS), which adjust their rates twice a year to reflect changes in the consumer price index. This year has also driven home the importance of diversifying more generally, with international assets outpacing U.S. securities by a substantial margin for the first time in many years, notes Lazaroff. He recommends keeping 20% to 30% of your stocks in international holdings and choosing bond funds that include international exposure as well.

“There’s a mathematical reason why diversification reduces volatility and returns compound better at lower volatility,” Lazaroff says. “But it’s also just an exercise in humility, saying we don’t know what’s going to happen. If you spread your bets, no one thing can topple your entire investment plan.”

As always, be vigilant, so you can act when needed to protect your savings.

Diane Harris is deputy editor at Kiplinger Personal Finance magazine. For more on this and similar money topics, visit Kiplinger.com.

Read more about savings and retirement on Seniors Guide:
How to Spend Retirement Savings Confidently