Retirement Planning For A Recession

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A recession is a common, if unpleasant, part of life. People who are retiring now have endured around six of them across a four-decade professional career.

Since the 1850s, there has only been one decade without at least one recession: the 2010s. That means you’ll likely have to deal with at least one or two periods of economic turmoil in your golden years.

“The reality is you can expect to have 25 to 30 years for retirement, so you’re going to go through these different economic cycles,” says Robert Gilliland, a Houston-based certified managing director and senior wealth advisor at Concenture Wealth. “You have to plan for all of those as best you can.”

What Is a Recession?

A recession is an economic downturn that can lasts for months or even years. They are marked by negative gross domestic product (GDP), rising levels of unemployment, falling retail sales and contracting measures of income and manufacturing.

In the U.S., the experts at the National Bureau of Economic Research (NBER) decide when we’re in a recession. Their criteria for a recession is “a significant decline in economic activity that is spread across the economy and that lasts more than a few months.”

There’s quite a bit of wiggle room in that definition. For instance, the Covid-19 Recession lasted just two months, but it was so deep that NBER was willing to compromise on the length.

Another common definition of recession is two successive quarters of negative GDP growth. This occurred in the beginning of 2022, but NBER has yet to officially declare a recession—mostly because the nation’s labor market remains so robust. Yet other metrics are faltering.

Read more: Are We in a Recession Yet?

Typically in a recession, folks will lose their jobs as consumers cut back on spending and businesses trim payroll. Stocks fall for a spell, and short term bonds yield more than long term debt, a phenomenon known as an inverted yield curve.

Preparing your retirement plan for a period of recession depends largely on your age.

Recession Retirement Planning in Your 20s and 30s

If you’re decades away from retirement, a recession has less of an impact on your long-term finances.

Your biggest goal is to amass enough savings to cover three-to-six months worth of essential expenses in an emergency fund, so you don’t fall into debt should you lose your job.

Once you’ve established a solid emergency fund, aim to contribute 10% to 15% of your pay into an employer-sponsored retirement plan, such as a 401(k).

With decades to go until retirement, you have time to make up for any decline in your retirement portfolio caused by a recession. Plus, the market declines that typically accompany a recession give you the opportunity to buy stocks for less than you otherwise could.

Keep Investing No Matter What

“If you are further away from retirement, it’s a good time to be investing because you’re able to purchase more assets at a lower cost,” said Laura Davis, a Nashville-based certified financial planner at Baird.

Set up automatic payroll deductions to your 401(k) so you can reap the advantages of dollar-cost averaging, while easing the burden of remembering to contribute after every paycheck.

You also need to keep perspective in the down times.

“It’s easy to get caught up in the hysteria and negative headlines,” said Alec Quaid, a Denver-based certified financial planner at American Portfolios. “Short-term market volatility does not need to cause anxiety at this stage of life due to your time horizon until retirement.”

Recession Retirement Planning in Your 40s and 50s

A recession takes on more danger when you’ve got a mortgage, growing children and a career. How do you balance short-term needs with long-term goals, like retirement?

One step is to remain laser focused on your investment process. “Don’t lose your discipline,” said Gilliland.

That’s especially important because you’re in your prime earnings years. Regularly revisit your overall asset allocation and rebalance your portfolio, perhaps once a year.

Mind Your Asset Allocation

“Try not to look at your statements too much,” Davis said. You don’t want to end up in a portfolio that doesn’t match your asset allocations: Either consider using a robo-advisor for help, or enlist a fee-only financial advisor.

If you weren’t maxing out contributions to your 401(k) previously, or at least putting away enough to garner a full company match, now is a good time to do so.

If coming up with the extra money is hard, give your budget a closer look so you’re not living beyond your means.

“Take advantage of every opportunity you have to set aside money and get matching dollars and set aside savings in a vehicle that has tax-deferred benefits,” said John Campbell, a senior vice president at U.S. Bank Private Wealth Management in Chicago.

Retirement Planning as You Near Retirement

Everyone has a plan until they get hit in the mouth. A recession in the years immediately preceding your retirement is likely to cause agita.

Can you still afford to call it quits and live the kind of life you envisioned? Yes, but not without some careful planning.

Scrutinize your budget and lifestyle needs. Take inventory of your various commitments and expenses to make sure that you can reasonably pay for everything that’s important to you without outliving your resources.

“It’s about being very intentional with what’s going out the door,” Campbell said. Even so, a recession during this period will likely to feel worse than one earlier in your career.

“Once you begin to envision yourself on a beach drinking a margarita without work responsibilities to return to, it’s common to pay closer attention to your nest egg,” Quaid said.

Make a Plan, and Stick with It

Don’t abandon stocks. You’ll only be selling low, and you’ll need their returns to fund your retirement income needs.

Build up your cash reserve so that it can cover up to four years of expenses, Davis said. That way, you’ll have a buffer so you don’t have to sell securities into a down market.

Having a good grasp on what different market outcomes means for your portfolio will help you keep the faith when times get tough.

“Do you hope, do you think, or do you know that you’ll be okay regardless of what’s happening?” said Nick Foulks, director of advising at Great Waters Financial in the Minneapolis area.

Now is the time to take a more active approach with your retirement plan as you enter “the retirement red zone” that begins five years out.

“It’s now more important to manage volatility than it is to earn a specific rate of return,” Quaid said. “Poor returns just prior to retirement or at the very beginning stages of retirement hurt you exponentially more than poor returns later in retirement.”

Navigating Recessions in Retirement

A recession during retirement can be tough to bear. While you don’t have a job to lose, you can’t add anymore to your portfolio, either.

In such stressful times, it can be tempting to do something. Avoid such temptations. Your portfolio is less risky than it once was, thereby hopefully limiting your losses.

“Hopefully, you’re already in a more moderate asset allocation so you don’t experience as much of a downturn,” said Davis.

This is where your bucket of cash, which should consist of roughly one year of expenses, can come in handy. Rely on that money in down markets so you don’t have to sell before you’re ready.

Also consider that your retirement years are separated into three 10-year phases: your go-go years (the decade immediately following your retirement), your so-go years (roughly between ages 75 and 85) and then the final years of your life. You’ll spend more in the beginning than in the end.

Talk to your financial advisor so that each stage is funded with the appropriate investment strategy and asset allocation.

Finally, don’t let your portfolio become an all-consuming obsession. While money is an undeniable need for retiring on your terms and the way you have your accounts positioned can help you to navigate periods of recession, focus on what’s important.

“There’s much more you can experience in the next season of life,” Foulks said. “Remember that beyond finances there are so many ways you can have an impact in the world, with your family and in multiple other ways.”

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