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Tariffs and inflation and market volatility, oh my!
Goldman Sachs raised the probability of a US recession in the next 12 months to 35%, up from 20% at the start of the year. Similarly, JP Morgan raised its recession probability to 40% from 30%.
While the Trump tariff tornado has led to significant stock market volatility and has dampened consumer confidence, retirees can navigate economic uncertainty and emerge relatively unscathed by taking the appropriate cautionary measures to protect the money in their retirement plans — their own yellow brick road to security.
Recessions are a natural part of the business cycle, historically occurring roughly every 6.5 years and lasting a little over 10 months on average. The most recent recession, during the COVID-19 pandemic, was also the shortest, lasting only two months. Since retirement can last 20 to 40 years, retired folks will need to navigate at least a few recessions.
Here are five ways to protect your retirement savings if the economy goes into recession, according to financial planners.
Retirees can protect their nest egg by recession-proofing their financial plan. PIKSEL/Getty Images
1. Stress-test your financial plan
You can stress-test your financial plan by simulating different economic or financial scenarios — such as high inflation, job loss, or recession — to see how well your financial strategies hold up, how your assets could be affected, and what needs strengthening.
By stress-testing your financial plan in different market conditions, you “can provide a piece of mind during a very scary time, regardless of what environment you’re retiring in,” Jaime Eckels, a financial planner and wealth management partner with Plante Moran Financial Advisors, told Business Insider.
Stress testing is vital for retirees who have passed their primary working years and must rely on their accumulated retirement savings to last the rest of their lives. A recession could erode the value and growth of your investments. At the same time, the cost of living may rise, depleting savings faster.
“The good news is that you can plan ahead and assume that at some future point in your retirement, you will experience a recession,” Pam Krueger, founder and CEO of Wealthramp, told BI.
2. Make sure you have enough fixed income
Financial advisors recommend shifting toward a more conservative investment strategy as you transition into retirement.
Fixed-income assets like Treasury bonds and CDs are good for portfolio diversification and provide predictable income for retired people whose other income sources may be slowed or interrupted during a recession.
“If a recession does hit, you need other assets in your portfolio and income streams to get you through it,” Eckels said.
Charles Schwab recommends the following portfolio allocation:
- Ages 60 to 69: 60% stocks, 35% bonds, and 5% cash
- Ages 70 to 79: 50% stocks, 50% bonds, and 10% cash
- Ages 80 and up: 50% stocks, 20% bonds, and 30% cash
“If you primarily have equity in your portfolio and you need cash to pay for your living expenses, now all of a sudden you have to sell out of equities at a low point in order to generate that cash,” Eckels said.
3. Avoid selling when the market is down
Stock market chaos has been a main driver of recession concerns, with the S&P 500 and Dow Jones seeing sharp declines with small recovery periods.
“Most retirees need the stock market’s growth in order to continue withdrawing income generated by 401(k), IRAs, and brokerage accounts,” Krueger told BI. She explained that if your retirement portfolio loses significant value early on in your retirement, your nest egg will deplete much faster and you then run the risk of outliving your savings.
During the COVID-19 recession in 2020, Eckels had two retired clients who were spooked by the market’s volatility. Despite advice to stay in the market, they decided to pull out to avoid further loss. However, both clients lost the opportunity to benefit from the upswing a couple of weeks later when the market began to recover.
“They thought they would be less stressed being out of the market,” said Eckels. “But they had more stress being out and didn’t know how to get back in.”
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4. Build up your cash reserve
When the market is in turmoil, the last thing you want to worry about is affording your regular living expenses or not having the cash flow to cover emergencies like medical bills. Healthcare costs tend to rise during a recession due to inflation and labor shortages.
Eckels emphasized the importance of holding cash in your portfolio since no one can predict when recessions are going to happen or when you’re going to see a sudden decline in the market.
Healthcare costs are among the largest expenses for retired people, with the average 65-year-old couple spending around $12,800 on medical-related expenses during their first retirement year, according to Fidelity.
Establishing a strong emergency fund or health savings account provides a safety net for retirees during a recession. It allows them to afford essential living expenses and prevents them from tapping into their retirement savings when the market is down.
“Make sure that there is some cash on hand that you feel like you have access to, and don’t have to panic and withdraw assets from your portfolio,” said Eckels.
5. Consider delaying retirement
It probably isn’t the advice you want to hear, but in some cases, delaying retirement is the best option if you have neglected to take the appropriate cautionary measures, such as stress-testing your financial plan and building a cash reserve.
“Delaying your retirement will have a huge positive effect because you can allow your retirement savings to recover untouched,” Krueger said. “With compound growth, putting off retirement for three years could add significantly to your balance.”
On the bright side, if you recession-proof your portfolio, a US recession shouldn’t impact your ability to retire on your own time. If you are unsure, your best move is to talk with a financial advisor.
“I’ve never had a client that I recommend putting off retirement for another year because things are too bad,” Eckels said. “I hope I never have that conversation because it means I have failed at my job.”