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Retiring During a Recession? Here Are Some Things to Consider

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What we’ll cover:

  • A recession can be particularly hard on people who are nearing or have just entered retirement
  • A recession may force some people to retire earlier than they planned due to job loss. It may also lead others to postpone retirement, so that they can avoid tapping into their retirement accounts during an economic downturn
  • Working with a financial advisor may help you to better manage and minimize the financial risks of retiring during a recession

The US officially entered a recession in February 2020 due to the widespread economic impact of the coronavirus, and many people are understandably worried about what a recession might mean for their financial plans. While a severe economic slowdown can affect us all in one way or another, it can be particularly hard on people who are nearing or have just entered retirement. 

The five years before and after retirement are often referred to as the “fragile decade.” A recession during this period could have a serious impact on your retirement funds. During the fragile decade, it could be harder for you to make up for any market losses in your portfolio. And if you’ve started to draw on your retirement funds, the withdrawals combined with the market losses could deplete your account faster than you had planned. 

Whether you’re approaching or already in retirement, this may be a good time to reach out to your financial advisor to revisit and reassess your retirement plan. Here are some potential recession challenges for retirees to be aware of and prepare for. Consider discussing them with your advisor as you review your retirement plan together.

Losing a job 

Unemployment numbers tend to go up during a recession when consumer spending falls and business activities slow. Losing a job is an awful thing to go through, but it can be particularly nerve-wrecking when it happens during a recession and if you’re close to retiring. 

If you find yourself in this situation, the most important thing to do is not panic. Easier said than done – we know. But this is when you want to call your financial planner and see how the job loss may impact your retirement plan. Before making any big changes to your retirement strategy or accounts, make sure you understand the financial implications of any decisions you may be considering. 

Your advisor could help analyze your current financial situation and make recommendations for next steps. For example, are you in a position where you could retire early? Or do you need to find a new job and continue working for a few more years in order to reach your retirement goals? Do you have enough in your emergency fund to give yourself some time to make any necessary transitions?

If you’ve received an early retirement package from your employer, this is also something that your advisor could help you with, highlighting the potential benefits or drawbacks of accepting the offer. 

Market losses and delayed retirement

Unlike younger workers, near-retirees don’t have as much time to ride out the ups and downs of the market, making it more difficult to recover from any losses in their retirement plan. This is why some people may choose to postpone retirement. The hope is that by working for a few more years, they could try to make up for those losses.

Remember, if you’re working, you can continue to contribute to your retirement accounts. That’s a few more years of savings you could put away. And because you’re still earning an income, you could leave your retirement funds alone for a few more years – that is, you could delay your withdrawals. 

This is where your financial advisor may be able to run some numbers for you and determine how changing your retirement date could help bolster your retirement plan. One important question you may want to ask is how delaying retirement could help you postpone your Social Security benefits. Generally, the longer you wait to take Social Security (i.e., until after your full retirement age), the higher your monthly benefits will be. Your advisor can help you understand how that may be beneficial in the long run. 

Retirement-timing risk

While delaying retirement has its potential benefits, it may not always be an option during a recession when companies are likely shedding jobs to help cut costs – sometimes forcing older workers to retire earlier than they planned.

Retiring before you’re financially ready to do so and in the midst of a recession could put a lot of strain on your retirement plan. 

Think about it this way: Without a job, you may have to start tapping into your retirement funds for income sooner than expected. Keep in mind, too, that you would be making these withdrawals during an economic downturn – a time when your portfolio may be seeing little or no earnings (or even losing money to market volatility). You’re essentially taking out money without putting any back in. And during a recession, the market is probably not generating enough growth for you to offset these withdrawals. This is why retiring during a recession could have an adverse impact on your retirement funds, increasing the chances of you running out of money down the road while you’re still in retirement.   

This type of retirement-timing risk is commonly referred to as a “sequence-of-returns risk,” and it’s something that you may want to discuss with your financial advisor. They can work with you to assess your risks and help you decide if you need to adjust your retirement plan accordingly (e.g., spending goals or withdrawal rates). They can also review your strategies to make sure that your plan is appropriately diversified and rebalanced so that you’re not exposing yourself to more risk than you’re comfortable with.

Parting thoughts

If it was up to us, we would tell the economy to hold the recession until we’ve cleared the fragile decade. But like many things in life, the timing and duration of a recession are mostly out of our control. 

The special challenges we’ve highlighted for those retiring in a recession may seem daunting, but by knowing what to look out for, it can help us to mentally and financially prepare for these potential bumps in the road. And remember, you don’t have to navigate these challenges on your own. Your financial advisor can help guide you and give you a sense of control and clarity over your retirement plan.


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