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How to protect your retirement savings from a crash

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Since the market hit rock bottom about eight years ago, it has been steadily improving, and investors have seen skyrocketing stock prices and annual returns.

Unfortunately, those spectacular averages won’t last forever, and the investment pros have some pretty pessimistic predictions for the future.

Asset management company BlackRock, for example, claimed in its quarterly investment outlook report that U.S. stocks are expected to gain an annualized 5.9% over the next 10 years (compared to the estimated 12% return investors saw in 2016).

It’s perfectly normal for the stock market to bounce around like a roller coaster. But here’s the problem: According to a survey by BlackRock, 66% of investors believe future gains will be roughly equivalent to what they’ve seen in recent years, and 17% believe they’ll be even higher.

On top of that, many investors are holding a few flawed assumptions about how much they’ll actually need to retire. While 56% of investors believe they’ll have enough money to retire, 65% said they were unaware that expected returns are predicted to be far lower in the future than they’ve been in the past.

So what can you do to protect your retirement savings in the event that the market crashes?

1. Check that your investments are aligned with your risk tolerance

The worst thing you can do when you’re faced with the idea of a crash is to put all your money in high-risk, high-reward stocks. Volatile stocks are already risky enough (especially if you’re an older investor who has a lot to lose), but when combined with the fact that the market as a whole is expected to drop over the next several years, it becomes even riskier.

Also, you may already be investing relatively aggressively because the market has improved so much over the last eight years. You may need to rebalance your portfolio to ensure your investments are aligned with your risk tolerance, otherwise, you could stand to lose a lot of money if the market tanks.

Talk with your financial adviser to determine how much risk you’re comfortable with. Then, he or she can help you decide which investments are right for your current and future needs based on how the market is predicted to perform.

2. Don’t invest anything you’ll need within five years

This has always been a good piece of advice for investors to avoid having to pull your money out of the market, but it’s especially true during a market downturn. What goes up must come down, but in the case of the stock market, what goes down still comes back up eventually.

If the market crashes, you’ll need to be able to ride the storm out rather than selling everything in a panic. By only investing money that you know you won’t need for at least five years, it will be easier for you to leave those savings untouched until the market recovers.

3. Eliminate as much debt as possible

If you’re nearing retirement age and your savings aren’t quite where you’d hoped they’d be, you’ll have to live below your means and save where you can. This is easier when you don’t have thousands of dollars of debt looming over your head.

In the event that the market takes a turn for the worse, you’ll want to be able to salvage every last penny. If much of your income is going toward a mortgage, loans, or credit card debt, you’re not in the best position to save as much money as possible.

This begs the question, though, of whether it’s best to put that money you’ve saved toward your debt or into your savings fund. There’s no short answer, but in general, it’s better to pay off your highest-interest debt (typically credit card debt) before investing it.

Again, the money you invest should be money that you won’t need for at least five years, so it’s wise to pay down as much debt as you can so you can be sure you won’t need to pull that money out of the market if a financial problem pops up.

4. Prepare for the worst

While it’s impossible to prepare a foolproof investment strategy for when the market crashes, there is something you can do that will make you more prepared than most people: Always prepare for the worst.

When you assume that your portfolio will, say, be cut in half in just a few years, you will work harder to ensure that you have enough savings to withstand that kind of a hit. It also helps you avoid panicking and making poor decisions during a crash because you weren’t thinking strategically.

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