Planning for retirement can be challenging. It’s hard to know exactly how much you’ll need to set aside and, perhaps more importantly, to save enough in the first place. We have a few factors working against us: the wide vanishing of pension plans, the rapidly rising cost of living and the grave possibility of Social Security running dry in 2037.
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But wait, there’s more: a recession could be on the horizon. Though the Fed doesn’t expect one will hit soon, that doesn’t mean one won’t. As we learned from the pandemic, which struck the economy into a freefall and slashed jobs across the board, one can happen at any moment and cause many to halt saving for retirement or make hardship withdrawals from their retirement plans.
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We always need to be prepared for a recession, because one will happen, sooner or later; it’s the nature of our economy. So, how then, do you plan for retirement while also being duly concerned about the economy?
Increase Your Emergency Fund
If you’re worried about a coming recession, beef up your emergency fund (in fact, this is a smart move even if you’re not worried about an economic downturn). Dre Villeroy, CEO of Beyorch, recommends having around six months’ worth of living expenses set aside, in an easily accessible account (ideally a high-yield savings account).
Re-evaluate Your Retirement Timeline
The rather unfortunate truth of the matter is that you may need to delay your retirement should the economy take a turn for the worse.
“A recession can significantly impact your retirement plans, so it’s important to reassess your timeline and make any necessary adjustments,” said Michael Collins, CFA, founder and CEO of WinCap Financial. “You may need to delay retirement or save more aggressively to weather the storm.”
Take Advantage of Catch-Up Contributions
Time is of the essence for all of us, no matter our age, but if you’re over 50, you should be extra aggressive in your retirement planning strategy.
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“If you’re over 50, you can make catch-up contributions to your retirement accounts, such as a 401(k) or IRA,” Collins said. “These higher contribution limits can help you boost your retirement savings in the years leading up to a recession.”
Diversify Your Portfolio
Hedging against risk and protecting your retirement savings from the full impact of a recession with a well-diversified portfolio.
“This means investing in a mix of stocks, bonds, and other assets to spread out your risk,” Collins said.
Consider a More Conservative Investment Strategy (if Close to Retiring)
Retirement planning isn’t one-size-fits-all-all, though some recommendations apply to everyone. Make key moves in terms of investment according to where you are in your life and how much longer you plan to work.
“As you get closer to retirement, it may be wise to shift your investments to a more conservative strategy,” Collins said. “This means reducing your exposure to riskier investments and focusing on more stable options, such as bonds or cash.’
Pay off High-Interest Debt
Millions of Americans bear the burden of debt, wiping out their savings and forcing them into financial insecurity. Pay it off now.
“If you have high-interest debt, such as credit card debt, make an effort to pay it off before a recession hits,” Collins said. “This will free up more of your income to be put towards retirement savings.”
Consider Downsizing
Many people downsize in retirement. Why not go ahead and do it ahead of the momentous transition?
“If you’re approaching retirement and have a larger house or expensive car, consider downsizing to reduce your expenses,” Collins said. “This can free up extra money to put towards savings and help you weather a recession.”
Explore Alternative Income Streams
“You could also explore alternative income streams, such as starting a side business or investing in rental properties, which can provide additional financial security,” Villeroy said. “Many opportunities exist that require very little money to be invested and offer high returns.”
Consult with a Financial Advisor
You don’t need to do this all on your own and you stand to land in a better position if you work one-on-one with an expert.
“A financial advisor can provide expert guidance on how to prepare for a recession and protect your retirement savings,” Collins said. “They can also help you create a customized retirement plan that takes into account your specific goals and risk tolerance.”
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