Recessions are a normal part of our economy. But no one can accurately predict when the next one will happen. It could happen at an inconvenient time for you personally. For one, you could find yourself retiring in a recession.
There have been 13 recessions since 1945, or about one every decade. So, many people have been in this situation. What’s most important to note is that recessions don’t last long – only around 10 months on average. Therefore, you don’t have to worry about them being retirement killers. Instead, you can take the following steps that will help you prepare for retiring in a recession.
Review your retirement budget
The idea of living on a strict budget may not sound like financial freedom. But in tough economic times, you may want to review and adjust – and even cut – some of your expenses, as needed. An easy way to do this is to simply review your bank and credit card statements to identify any unnecessary spending.
You might consider some small adjustments, such as refraining from making any large purchases, reducing your subscriptions and memberships, and lowering your insurance premiums, if possible. Some bigger changes would include downsizing your home or selling any vehicles you don’t use.
Keep a little more cash on hand
The rule of thumb is to have three to six months’ worth of expenses saved in cash for an emergency. But in tough economic times, you may want to consider holding up to a year of retirement account withdrawals in cash. This can help give your accounts time to recover.
Adjust your withdrawal rate
As you prepare to retire, your withdrawal rate is an important part of managing your portfolio. In a recession, you could end up selling investments that are declining in value to fund your withdrawals. This could impact the sustainability of your retirement savings.
One way to bypass that danger is to maintain a flexible withdrawal rate. In a downturn, you may temporarily lower that rate, and then as market conditions improve, you can raise your withdrawal amounts.
Keep investing
The key to investing before, during and after a recession is to keep a long-term perspective. Aggressive market-timing moves, such as shifting your portfolio to cash, can backfire. Consider some of the biggest market gains can happen at the tail end of an economic cycle or immediately after a steep market decline.
It’s often better to stay invested to avoid missing out on the gains from the stock market recovery. In the first year after the five biggest bear markets since 1929, investors saw an average return of 71%, according to Capital Group research. It helps to have a mix of investments, or asset allocation, that is broadly diversified and aligned with your specific long-term financial goals.
What asset allocation is right for you depends on personal factors, including your goals, age, savings and income, and risk appetite. A financial adviser can essentially run a stress test to see how your portfolio would hold up under various market conditions. This can give you a probability of how long your portfolio would last in retirement. Just keep in mind, no investment strategy is guaranteed to prevent investment losses. Temporary market losses are as normal as the recessions that can cause them.
Consider adjusting your retirement date, if possible
If you feel uncomfortable with the possibility of retiring in a recession, one option is to adjust your retirement date. That can mean retiring earlier than planned, as some companies may offer severance packages or reduce benefits in anticipation of a recession.
Or, it may mean briefly delaying retirement. Waiting a year or so could put you in better position to start withdrawing from your savings. By then, the economy and market may recover while you have added more contributions to your nest egg.
The best time to prepare for retiring in a recession is before a recession occurs. Unfortunately, no one knows when that is. The good news is that you can take the steps above today to prevent a recession from derailing your retirement.
For more information about how a recession could impact your decision to retire, watch the recording of our webinar: Retiring in a Recession.
