Few ever feel ready for retirement, but a potential recession can shake the confidence of even the most prepared.
Maybe everything will be fine and the economy will continue to chug along — or maybe we’re headed for a rough recession. Without any way of knowing, you may be strongly tempted to make some financial moves right now. But should you?
That depends on your personal situation and your appetite for risk. Let’s talk it through, starting with the simplest and safest options and moving toward riskier and more complicated ones.
1. Work longer
When the economy goes south, it often takes the stock market with it. That can shrink the size of your nest egg, at least temporarily.
The less you have to dip into your investments at what may be one of their lowest points, the more time they have to recover.
That means if your health and situation allow, continuing to work is the safest step to take. It gives you an opportunity to keep growing your nest egg instead of raiding it.
Even if you can’t work full time, you may have more options than you realize — from taking on a project-based or consulting role at a previous employer to picking up part-time and work-from-home jobs that didn’t exist several years ago.
Check out “21 Ways Retirees Can Bring in Extra Money” and consider a service like FlexJobs, a subscription-based jobs board that vets postings for work-from-home jobs and other flexible work.
2. Wait it out
This is the stock advice everyone hears during bad times: Sit tight and wait for the market to recover.
Yes, your situation is more pressing than that of people who have several more years of work ahead of them. But to the extent you can, avoid touching your investments and otherwise proceed as planned with your retirement.
This is the simplest course if you’re not in a position to continue working or to pick up new work. It’ll go smoothest if you already have enough cash to cover a couple of years’ worth of living expenses.
If you’re not yet drawing Social Security and are younger than 70, there’s one more big benefit of waiting: You can boost your Social Security benefit.
3. Examine your portfolio
Reviewing your investments might give you the peace of mind you need to wait things out, or it might spur you to make some needed changes.
For a starting point, compare your current asset allocation with the rule of thumb Money Talks News founder Stacy Johnson often recommends.
As he explains it in “5 Mistakes That Will Ruin Your Investment Returns“:
“Start by subtracting your age from 100, then put no more than the resulting figure as a percentage of your long-term savings into stocks. So if you’re 25, 100 minus 25 equals 75 percent in stocks. If you’re 75, you’d only use stocks for 25 percent of your savings.”
Are you too heavily invested in stocks? Are you safely diversified in index funds, or dangerously concentrated in a sector that might get hit hard? What are the fees like on your accounts?
More importantly, what does your gut tell you about the possibility the market could drop by half, as it did during the Great Recession? Is that something you can handle?
These are questions you should be asking yourself regularly, and long before the economy sours.
4. Reset your expectations
Here’s another retirement rule of thumb: Plan to withdraw no more than 4% of your savings annually. If you want to keep pace with inflation, you could modify this rule of thumb by increasing your 4% annual withdrawal by the current rate of inflation.
That should give you about 30 years’ worth of money to work with.
So, it’s time to do some math: Could you live on 4% without adjusting for inflation for a few years, if you had to wait for the market to recover from a crash? If you can tolerate a little squeeze now, you’re less likely to face a far bigger squeeze later.
It’s much easier to adjust your expectations than your portfolio.
5. Ask for help
If you don’t already have a financial advisor , you’re likely wondering whether you need one. Or maybe you just wonder how to find someone you can trust.
It’s reasonable to be skeptical. Some people do fine without a financial advisor. And most advisors aren’t legally required to act as a fiduciary, meaning they aren’t obligated to put your best financial interests before theirs.
So, the first thing you’ll want to do is rule out commission-based advisors and look for someone who will charge you either a flat fee or by the hour, just like an accountant would. This makes even more sense if you’re not looking for a long-term relationship and just want a professional to evaluate your gut reaction to a downturn.
6. Consider an annuity
If all the variables of retirement are becoming too overwhelming, an immediate annuity is another option that could provide some consistency and simplicity.
An immediate annuity is essentially a pension, but from an insurance company. You pay them a lump sum, and they pay you a guaranteed monthly income.
Pair an annuity with Social Security, and you might worry far less about what the market is doing.
But while annuities sound straightforward, there are several kinds — and they can be quite complex and full of fees. Do your homework, starting by checking out “2-Minute Money Manager: Should I Buy an Annuity?”
7. Roll the dice
The thinking behind Stacy’s asset allocation rule of thumb mentioned previously is to continually rebalance your portfolio to reduce your risk as you age. The less of your money you have tied up in the stock market, the less you need to worry about the market tanking.
This limits the nightmare scenario of a sudden shortfall — but it also arguably increases the danger of a gradual erosion of your retirement savings from inflation.
Once you take money out of the stock market, it will generally grow at a slower pace, which might not be good enough to address rising costs. There is always the risk you have more years than money.
What if you don’t walk out of the market, but instead hold your investment steady, or even double down by increasing the percentage of your portfolio in stocks? You might do better, but nothing is guaranteed.
So, think things through, including the potential peril of challenging conventional wisdom.
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