What does a recession mean for your retirement? | Smart Change: Personal Finances
The U.S. economy contracted for a second straight quarter, rekindling concerns among many Americans about the possibility of a recession.
To be clear, we are not officially in a recession yet. The National Bureau of Economic Research (NBER) is responsible for deciding when the country is in a recession, and it looks at factors such as the labor market, consumer spending, worker incomes and GDP to determine when to make the call.
Despite the slowing economy, the NBER has yet to declare a recession. While no one knows when or if this might happen, it may be wise to start preparing just in case. Here’s how it could affect your retirement.
How a recession could affect your savings
The biggest concern retirees and future retirees might have about a potential recession is your savings.
The stock market will often (but not always) experience a significant decline during a recession. This means that your retirement fund could suffer and your portfolio could lose value.
Coupled with rising inflation, a recession could make it harder to make ends meet in retirement. When the cost of everyday goods and services increases but your savings decline in value, it will be especially important to spend wisely in retirement.
Social Security and other sources of fixed income, such as a pension, can be helpful during an economic downturn. But depending on your income, you may still need to cut spending to avoid depleting your retirement fund too quickly.
In some cases, it may make sense to work an extra year or two. Not only will this strategy give you more time to save, but you’ll also avoid having to withdraw money from your retirement fund when the stock market is down.
Steps you can take to prepare
A recession does not spell disaster for your retirement plans. With the right strategy, you can protect your savings as much as possible.
One way to protect your retirement fund is to double-check your asset allocation. As you age, your portfolio should gradually move towards the conservative side, which means it’s wise to invest more in bonds and less in stocks.
Bonds have lower average returns than stocks, but they are also less affected by market volatility. If we are facing a recession and the stock market falls, more prudent asset allocation can help cushion the blow.
A well-diversified portfolio can also protect your savings. Not all stocks will be able to recover from a decline. But when your portfolio contains at least 25-30 stocks from various industries, there’s a much better chance that your investments will rebound even if one or two stocks don’t survive.
No one knows for sure when or if we will experience a recession, but it’s wise to start preparing anyway. By taking steps to protect your investments and heading into retirement with a strategy, you’ll be prepared no matter what.
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