dfWhen I am asked whether the market is going up or down tomorrow I always answer the same way, “Yes, I just don’t know which.” With the recent 30th anniversary of Black Monday, the single worst day in Wall Street history, it is a good time to ask, “Are you ready for the next Black Monday, or whatever day of the week that black day is?” The Dow fell 22.6%, the equivalent of a 5,000-point free fall at current levels, in one day. We have short memories. The average investor isn’t worried, are you? Cam you handle a 22% one day drop or a protracted 53% drop like 2007-2009?

There’s reason to be skittish. The current run-up is the second longest and strongest on record. Stocks are expensive by historical standards. And you never know what outside event could trigger a scary market drop. Have you ever heard the old Wall Street adage, bull markets die of fright, not old age.

reMany people have become complacent because this bull market has gone on for so long, but the risk of giving back some or a lot of recent gains is quite high. That’s especially true for 55 and uppers, near or in retirement. So how can you protect yourself? You must avoid the standard advice to “stay the course”. It is time for you to be driving in the slow lane, financially speaking. Caution is the word. Even mild stock-market losses or an extended period of below-average returns can inflict serious damage if they come 5 years before or early in your retirement. If you need to sell investments to cover your living expenses, you’ll lock in those losses. And since you’ll have a smaller balance left in your portfolio, you’ll gain less when stock prices eventually recover. Cautious, steady growth in your investment portfolio is critical to ensuring your money will last your lifetime.

You must make a mental shift and allocate your retirement savings as three buckets. The first bucket should hold enough cash and short-term investments for emergencies. The second bucket, provides minimum living expenses via guarantees (Social Security, pensions, annuities, etc. and the third bucket can be utilized for longer term growth. The middle, guaranteed bucket is the salvation. That provides certainty instead of hope. A side benefit is that studies from Towers Watson and others show that retirees who have sufficient guaranteed income tend to be happier and feel they have a higher standard of living than those who rely on savings alone.

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