There’s no need to freak out if you finally reach the point where you can retire during an economic downturn. In most cases, recessions are characterized by extended periods of negative gross domestic product (GDP) and sluggish economic development, which may result in layoffs and turbulent stock market conditions.
For someone who is retiring, the possibility of losing their job might not be as significant of an issue. However, the potential that investments experience volatility right when you’re depending on them for income can cause anxiety.
1. Examine Your Spending History
While many people don’t keep a household budget during the earning years of their career, they want to live on a tight budget in retirement. I have a different strategy to assessing spending history: I look at macro trends in spending patterns by summing up all annual spending over the last three years. Collect all credit card and bank statements to find spending averages to gather the most up-to-date data.
To see if this spending pattern can be maintained for the next 30 years in retirement, ask yourself the following question:
Can you afford to continue this lifestyle relying on your portfolio savings and guaranteed sources of income, such as Social Security benefits?
One spending pattern I see come up after retirement is spending money on significant activities, such as home improvement, or a hobby like restoring classic cars. Sometimes these can cost tens of thousands of dollars and put stress on their financial plan.
One of the easiest ways to reduce spending is to reduce monthly automatic subscription payments. This can be done in many ways, For example, you can increase home and auto insurance deductibles in exchange for lowering their premiums.
Hot Tip: Many Americans downplay the importance of saving for retirement. It’s vital, better late than never!
2. Understand You Will Need Enough Money to Last 20-30 Years
People in their 60s may be confident and comfortable retiring with up to $5 million or more in investment assets. However, they’re likely still trying to determine whether their money will last at least two decades. A different statistical model can be used to determine a retiree’s sustainable withdrawal rate, including longevity risks.
All Fidelity 401(k) plans are designed to fit individual situations. They should help a person or couple reach their financial goals by meeting a long-term and sustainable level of withdrawal from their portfolio. The plans are built to withstand the stress of a recession or geopolitical crisis.
3. Build a Plan to Survive a Down Stock Market
Those who have a comprehensive financial plan should be able to ride out any storm without making costly errors. However, many retirees go to their financial planner with a fear-based mentality and want to sell their investments when there’s a market downturn.
Financial planners often see that the retiree will take a loss on their investments but later regret it when the market reverses course.
For example, a retiree goes to their financial planner and loses 20% of their stocks from selling during a market downturn. When the market reverses and hits all-time highs, they’re already locked in their losses. Now they’re also losing out on the benefits of the market gains.
To help clients prepare for retirement, I created a bond ladder. A bond ladder enables an investor to purchase various individual bonds with different maturity dates – the date an investor receives the interest payment on their bond.
For example, a person could invest $100,000 and buy ten different bonds with a face value of $10,000.
Since each bond has a different maturity date, it can set a household and investor up to gain a regular stream of guaranteed income from the high-quality bonds, especially when they’re held until maturity.
Even though retiring during a recession may seem daunting, it’s doable if you have a solid financial strategy. If you’re having trouble getting there on your own, work with a financial adviser. Even more importantly, don’t forget to follow the three steps mentioned above. They can aid you in retiring more efficiently and effectively in a slowing economy.