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23 Biggest Ways To Recession-Proof Your Retirement

·13 min read

The U.S. is bracing for a major economic downturn as it grapples with the ongoing spread of COVID-19. Americans lost some $2.7 trillion from their defined contribution plans and IRAs as a result of the 2008 recession, the Urban Institute reported. Recessions are historically double-dip, which makes this situation especially worrisome for anyone who is nearing retirement age.

Leading economist Stephen Roach, the former Morgan Stanley Asia chairman, warns that U.S. consumer demand will struggle to recover despite businesses reopening in various phases across the country.

?The odds of a relapse, not just the virus but in the economy itself ? the so-called dreaded double-dip, is very real,? Roach, who predicted in January that the coronavirus outbreak would eclipse the SARS impact in 2003 and devastate the global economy, told CNBC?s Trading Nation. ?This behavioral capitulation on the demand side of the U.S. economy is going to continue to create a lot of problems for businesses, business hirings, [and] potential corporate bankruptcies in the second half of this year,? he said.

Fortunately, there are steps you can take to recession-proof your retirement so that you can still enjoy your golden years despite a downswing in the market.

Last updated: Oct. 20, 2020

Don't Panic

“Even if you?ve just retired or you’re planning to retire a year or two from now, don’t panic,” Charlie Nelson, CEO of retirement at Voya Financial, wrote in a LinkedIn blog post. “You, too, still have to think about the long term. Certainly, you need to consider how to best fund your initial years in retirement without sacrificing the ability to generate returns over a longer period of time. Keep tabs on the market, but don’t assume your plans are off or need to change all that much, as ultimately, you still have plenty of time to be in the market.”

Nelson noted how quickly the U.S. bounced back after the 2007-08 global financial crisis.

“The U.S. economy contracted by 0.1% in 2008 and 2.5% in 2009. But, by 2010, the economy was growing at pre-meltdown rates, and stocks largely recovered by 2013,” he wrote.

Continue Contributing To Your Retirement Accounts

As you approach retirement and markets are down, you might be tempted to stop contributing to your 401(k) or IRA, or you might even think about selling off stocks in your portfolio. Don?t act so impulsively.

You can generally maintain your 401(k) with your former employer or roll it over into an individual retirement account. IRAs maintain the tax benefits of your 401(k) plan and enable more investment options.

T. Rowe Price found that more 83% of 401(k) participants want to keep their savings in their employer plan upon retirement. Of the 83% of respondents, 53% said they would stay in their employer plan if it offered solutions to help generate income, while the other 30% said they would stay in the plan regardless of whether a retirement income solution was available.

“This is the time to be buying — when the market is very low to be in a good position to grow that portfolio when the recession wanes,” said Brian Burke, founder of SellYourMac.com.

Diversify Your Assets

“There is never a bad time to diversify with an eye on retirement income,” said Adam Goetz, a partner at Burstin & Goetz in Pittsburgh and incoming president of MassMutual?s advisors’ association. He noted that “it is crucial to build retirement assets that are non-market correlated.”

“Laddered bonds, money market funds and cash values inside of life insurance policies can all be powerful tools,” he said.

The point of diversifying your assets is, as Adrienne Ross, CFP, founder of Clear Insight Financial Planning, LLC, explains is to both spread out risk in case any investments don’t do well and to capture the upside of investments that do.

Invest In 'Real' Assets

People nearing retirement should “work [their] way into real assets over the next couple years as they begin to go on sale,” said Phil Town, founder of Rule #1 Investing.

Real assets include precious metals, commodities, real estate, land, equipment and natural resources.

Dennis Notchick, a certified financial planner for Stratos Wealth Advisors, suggested gold as an ideal real asset to invest in because at present, ?gold is doing well and will probably continue to do well.?

Decrease Your Stock Exposure

“As you enter your 50s and progress into retirement, you should gradually increase your exposure to bonds and decrease stock exposure,” said Brett Tharp, CFP, financial planning education consultant at eMoney. “Target-date funds are a convenient way to accomplish this.”

If you’re not sure how much to allocate for bonds, follow this rule: “One rule of thumb is to keep at least 60% of your assets in high-grade bonds if you’re only a few years away from retirement and increase it to 70% or more when you retire,” said Andrew Latham, managing editor for SuperMoney.

Find Out: How Much You Should Have in Your Retirement Fund at Every Age

Use a Bucketing Approach

In addition to spreading out your investments across different assets, you should also have a mix of investments intended for short-term and long-term retirement funding.

“For retirees or near-retirees, we suggest using a bucketing approach for your investments, where you should have a mix of investments that fund spending now, soon or later — not just one big pie chart with a bunch of assets for one goal,” said Rob Williams, vice president of financial planning at Charles Schwab. “If someone is closer to retirement and needs part of their savings sooner, then that money should be invested more conservatively.”

Consider a Roth IRA Conversion

If you think the stock market will have a chance to rebound before you want to retire, you might consider converting a traditional IRA to a Roth IRA, said Travis Cook, CFP, president of Convergence Financial.

“The ideal time to fund a Roth IRA is when the market is low, and by converting to a Roth IRA, you can convert a greater number of your investment shares due to the market decline,” he said. “Even though converting your traditional IRA to a Roth IRA means you?ll have to pay some taxes now, you?ll be paying fewer taxes than you would down the road when your investments were up because the current value of your portfolio is probably lower.”

Come Up With a Plan for Retirement Income

Planning for retirement includes ensuring that you will have income streams once you stop working your day job.

“Focus on your income plan as much, if not more than your accumulation plan,” he said. “Far too many plan for retirement as if it?s a single destination at a specific time, and therefore only plan to grow their assets as high as they can. While this is extremely important, you also need to build a plan to monetize that asset and provide a relevant income stream for potentially three decades or more. What if market volatility becomes the norm? What if low-interest rates bring on inflation? What if retirement for you and your spouse last well beyond three decades? These are all considerations in building your retirement income plan.”

Consider Deferred Annuity Options

“Take this opportunity to also look to integrate some programs with more protection built-in while still allowing for upside growth,” Goetz said. “There are some efficient deferred annuity options in the marketplace that can complement a well-diversified investment portfolio and give significant growth potential, but also give some peace of mind for the next market correction.”

Consider Working Part Time in Retirement

Without an asset you can rely on to provide a steady income stream, staying employed offers guaranteed income in retirement.

“It?s important to keep working as long as possible even if it?s not in a full-time role,” said Steve Gickling, founder and CEO of ETLrobot. “Having some type of gig role to put your talent to work can supplement your retirement for all market conditions. Plus, it?s a good way to keep the mind and body sharp during your retirement years.”

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Create a Retirement Budget That Isn't Dependent on Market Conditions

Goetz recommends “building a detailed and realistic budget in retirement” that includes knowing which income you will use for which expenses.

“Try to separate ?wants? — travel, entertainment, etc. — from ?needs’ — housing expenses, food, taxes, insurance, etc.,” he said. “For the needs column, link expenses to guaranteed income sources, such as Social Security, pensions and income annuities. This approach can take a lot of pressure off of the income that is needed to be generated off of investment withdrawals as adjustments can be made if market conditions allow for it. It is much better to take that trip around the world off of an IRA withdrawal following a great market year.?

You might even practice living off your expected retirement budget to ensure you have budgeted correctly. Since you typically spend less during retirement than your income-producing years, “doing so can also help you put aside more money for retirement because you won?t be spending money on unnecessary expenses,” said Chalmers Brown, CTO and co-founder of Due.

Create a Fund for the 'Expected Unexpected'

Especially during volatile times, it’s important to have access to liquid funds.

“We recommend all investors set aside cash for emergency expenses,” Williams said. “Retirees or near-retirees should have enough cash to cover at least one year of expenses, and those not yet in retirement should have three to six months of expenses.”

Rather than thinking of this as an emergency fund, Ross finds it more constructive to think of this as “a fund for the expected unexpected” — because life happens.

Cancel Unused Subscriptions

GOBankingRates found that Americans waste $348 a year on subscriptions they?re not using. Now is the time to, as Thomas Smyth, founder and CEO at Trim advises, “get your financial house in order. Go through your credit cards and cancel any unused subscriptions.

Look For Ways To Save On Fixed Expenses

There will, of course, be some expenses you are unable or unwilling to eliminate. For these expenses, look for ways to save on costs.

“It?s likely that you?re overpaying for your cell phone bill and for services such as cable TV and internet,” said Leslie Tayne, founder and head attorney at the debt solutions law firm Tayne Law Group. “Shop around and see if you could save by switching, and in the meantime, call your service providers and see if there are any ways for them to lower your bill, either temporarily, permanently or both. The lower your cost of living, the more of a cushion you?ll have for the unexpected events in life. This means a good work-through on your budget now and for retirement.”

Plan Now: Here?s Exactly How Much Savings You Need To Retire In Your State

Negotiate Any Outstanding Debt

Ideally, you won’t take your debt with you into retirement. This means focusing on paying down any debt you have, including your mortgage, credit card bills and medical debt. Consider calling your lenders to ask for lower interest rates to make this goal more attainable.

“Negotiate all of your bills — especially medical bills,” Smyth said.

Contribute Money to Savings Every Week

Your investment accounts should not be the only place you hold retirement savings, as they are obviously vulnerable to a recession.

“Set up a high-yield savings account and move money into it automatically every week,” Smyth said.

Open a Savings Account Instead of a CD

If you don’t need immediate access to funds, financial advisors often suggest opening a certificate of deposit (CD). These accounts can often yield more interest than a savings account — but not right now.

“Opening a CD at interest rates near zero does not make sense because you are giving up accessibility,” Ross said. “There are many online savings accounts that will pay more than the average 12 months CD rates currently available. “

Put a Pause on Major Purchases

Your focus should be on saving, not spending, which means reevaluating any plans to make major purchases.

“If you had been thinking about a vacation or new car, hit pause and ask if that still makes sense right now,” said Amy Diesen, vice president of retirement plans at Ameriprise Financial.

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Don't Be Overly Generous With Children and Grandchildren

“Some adult children may look to their retired parents for financial support. If this may be the case for you, be judicious about taking on your adult children or grandchildren?s expenses,” Diesen said. “Remember — your grandchildren may be able to take out a loan for their education, but you won?t be able to acquire a loan for your retirement expenses.”

Have a Plan for Collecting Social Security Benefits

Collecting Social Security can help you delay the need to dip into your other retirement assets — which is especially useful if your portfolio has recently lost value.

“Social Security can be an excellent supplement for your retirement income,” said Mack Bekeza, CFP at Millennial Wealth Management. “To know what your expected benefit can be, go to SSA.gov, create an online account, make sure that your earnings history is accurate and your estimated benefit should appear. Although the benefit won’t take care of all of your income needs, it is still worthwhile to utilize. Also, remember that there are numerous social security strategies to maximize your benefits.”

One way to increase your benefits is to delay collecting them.

“Delay starting to take your Social Security benefits as long as possible,” said Jon Bradshaw, president of Appointment. “That way, you can have those additional funds to help you during all types of potential recessions that may hit during retirement. It can mean a few extra hundred dollars a month, which can be valuable on a fixed income.”

Hold Off on Withdrawing From Retirement Accounts

If you’re nearing retirement, avoid making any withdrawals from your retirement accounts — especially when the market is in a downturn.

“Don?t withdraw from your retirement plan early ? even though the CARES Act now allows it,” said Kelly Crane, CFP, president and chief investment officer at Napa Valley Wealth Management. “Taking distributions now will lock in losses, reduce your principal and make it difficult to achieve a sustained lifetime withdrawal.”

Take Care of Your Health

“To recession-proof your retirement when you are close to retirement, focus on maintaining good health to minimize otherwise unnecessary healthcare costs that consume your retirement funds,” said serial entrepreneur John Rampton. “It?s also good to plan for Medicare and purchase supplemental medical insurance to protect your retirement money.?

Seek Professional Guidance

Whether you are nearing retirement or still have time to plan, the best moves to recession-proof your retirement can vary from person to person. Getting expert advice can help ensure you’re on the right track.

“If people need guidance, working with an advisor is helpful to map out a financial plan,” Tharp said.

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Gabrielle Olya and Nicole Spector contributed to the reporting for this article.

This article originally appeared on GOBankingRates.com: 23 Biggest Ways To Recession-Proof Your Retirement